What has the government got against pensions? Its confusing and ever-changing stance toward saving for retirement, particularly with regard to higher earners, will be thrown into sharp relief next week.
On 6 April, the lifetime allowance for total contributions made to pension pots comes down again, from £1.25m to £1m. In 2006, the year it was introduced, the allowance was £1.5m. Above the allowance a punitive tax rate of 55 per cent applies on lump sums.
The annual allowance for pension contributions has also been given a severe pruning in recent years. It is currently capped at £40,000 a year.
The latest salvo aimed at top earners was a pre-Budget consultation on abolishing the higher rate of tax relief on pension contributions. In the end, this radical proposal to do away with the 40 per cent level of relief was dropped following an outcry. Why all the changes?
Chancellor George Osborne appears to view pension contributions as a cost to the Treasury rather than as a system that allows people to defer the tax they owe, which is a view of the system widely held in the industry.
Few would be surprised if ministers review the decision on higher rate tax relief at a later date, or mount further raids on the annual and lifetime allowances. Some pundits believe the tax free lump sum could eventually be ditched.
No wonder many people appear to have lost heart with saving for the long-term. According to a new savings study by Scottish Widows out today, 45 per cent of 35-49 year-olds prefer to “spend now” instead, a mentality traditionally seen in younger people.
Even the new Lifetime Isa (Lisa) for the under 40s, which attracts a large government top up towards retirement or buying a house, comes with several riders. It does not allow for employer contributions as would a standard pension, and the government stops paying in when you reach 50.
Former pensions minister Steve Webb accused the chancellor of risking “mass confusion”, with young people forced to “work until they drop” if they put their faith in the Lisa. If the government is really serious about closing the pension savings gap, it needs to stop giving muddled messages on pensions, especially to higher earners. Options like the Lisa are good but the incentives to save need to remain intact.