16th February 2016
There is around a month before we know what is going to happen to pension tax relief. Change could be revolutionary and not necessarily in a good way argues Mindful Money
A range of reforms are under consideration most of which look to benefit the Exchequer. The case for change, which is expected to involve paring back higher rate tax relief on pensions, is that the money could be better spent incentivising more people on lower and middle incomes to look after themselves better by saving for retirement. That might see relief equalised at some mid point or abolished and replaced with an incentive.
This is all very complicated and it is possible that any change is moved to the ‘too difficult’ pile, but that does not appear to be this Chancellor of the Exchequer’s style.
As with the pension tax changes, when a reform is suggested by George Osborne, it is usually implemented.
So it is possible that in a month’s time, all pensions will attract tax relief rate of 33%. However many experts say that a much lower figure could be introduced say of 25% for everyone. On some calculations, this could see the Exchequer garner an extra £6bn a year, a more than handy sum when the ambition is to close the deficit quickly.
Then there is what might be called the nuclear option where tax relief on the way into a pension is scrapped altogether though the pension ‘wrapper’ would provide shelter from any tax on investment growth and dividends and would be free on the way out of the pension – in theory at least. This is loosely described as a Pension ISA because it operates very much like an Isa though unlike Isas the government is expected to offer some contribution as an incentive.
Whatever happens, this is a huge potential change which should have everyone currently saving and investing into a pension on their guard. At Mindful Money, we are worried that the interests of this responsible segment are not being properly taken into account, arguably because in these cases the incentives (or just some innate common sense of the part of these investors) have already worked. We find it odd that they should be punished as a result.
Of course, the critics of the policy have been many and varied, though most are in the ‘they would say that wouldn’t they’ camp. The big trade body for the pension companies, the Association of British Insurers says the move to a pension Isa even with some incentive could cut pension savings long term by around a sixth. It claims that over 20 years it will actually make the fiscal deficit grow not shrink which could prove to be a telling criticism.
Perhaps an even more barbed and politically astute accusation has come from Steve Webb, the former pension minister in the coalition, who now covers pension policy matters for mutual insurer Royal London.
He has suggested that by doing away with tax relief, the Chancellor risks repeating former Chancellor and PM Gordon Brown’s mistake when he abolished advance corporation dividend tax credits. Although presented as tidying up an anomaly, Brown’s move in the last 1990s is widely thought to have been responsible for stripping around £6bn from pensions annually. The number is eerily close to the take the Treasury may get from some of these reforms.
Talking about the pension ISA, Webb said recently: “The damage done to pension saving would be incalculable, as pensions are once again seen as a convenient pot for cash-strapped Chancellors.” The Institute for Fiscal Studies has added it tuppence, saying the Chancellor of Exchequer is using pensions as a ‘milch’ cow.
So where does this leave investors? Well, as you can see, something of a political battle is being fought on your behalf. There are strong suggestions that there may be a political price to be paid for what will surely be seen as a raid on pensions. But you might help matters by writing to your MP. Many postbags are already filling up but a few thousand more letters and emails to MPs cannot hurt. That is probably doubly true if you are represented by a backbench Conservative MP.
And what to do in the meantime? Well if you have the spare money to take as much advantage as possible before the end of tax year and arguably before the budget (forestalling measures could even stop a last minute rush) then perhaps you should strongly consider placing it in a pension.
Any clampdown would see you faced with a Hobson’s choice of finding less tax privileged ways to invest in the market or by seeking riskier types of investments such as VCTs and EISs – excellent vehicles but only for investors that really appreciate the risks and the conditions attached.
It is also interesting that many middle managers are already facing clampdowns with cuts to the lifetime and annual limits set to retrict their options from next year. Indeed a steady stream of changes in the last six years or so have seen a slow motion crackdown – at first catching very senior executives but now encompassing workers in middle management.
A move to end of limit tax relief compounds the situation. It is, in our view, a mistake certainly without much more research into the impact of the various options. We are deeply sceptical whether a change boosts savings. There is absolutely no justification for changing things to improve the deficit situation today, only to exacerbate things tomorrow.
With about a month left before the change might be introduced, we certainly don’t agree with this raid. We wonder whether George Osborne will want a reputation as a raider of pensions. Not a good reputation to attract for someone with designs on the top job.