Summing up: Tax relief overhaul threatens industry

"Strengthening the incentive to save" - the title of a Government consolution paper. Picture: Phil Wilkinson

"Strengthening the incentive to save" - the title of a Government consolution paper. Picture: Phil Wilkinson

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THE UK’s pension firms are good at fighting their corner when they need to. They’re not shy when it comes to protecting self-interest, put it that way.

But this time the stakes are particularly high, because the task is to persuade the government to rule out a proposed tax relief overhaul that could finish off the pensions industry as we know it.

The government’s consultation on overhauling the pensions tax relief system, which launched in July, closes this week. The title of the consultation paper – “Strengthening the incentive to save” – gives a clue as to what the pensions industry is up against.

Most consultation papers include some kind of evidence to support the proposal. Not this one. The paper suggests the current tax relief system undermines incentives to save, and that changing to a different system would change that. Unfortunately, however, there is literally nothing in the paper supporting that argument.

Zilch. And you know why? Because when it comes to pension reform, it’s the Treasury that has the biggest incentive to save. If you still believe that the Chancellor has your best interests at heart in his pensions “revolution”, you’re a long way off the mark.

The so-called pension freedoms announced in 2014 and launched in April this year are an obvious case in point. This was about two things: the 2015 election, and Treasury coffers.

The tax relief proposals – which could see pensions move to an Isa-style system where the tax relief comes at the end rather than the beginning – are simply about those Treasury coffers. Scrapping upfront tax relief in favour of tax-free withdrawals later on would enable the government to bring forward tax receipts of up to £40 billion a year, accountants Baker Tilly estimates.

Put it this way: what would George Osborne – who supports welfare reforms that are killing innocent people every week – NOT do for a tax windfall worth hundreds of billions of pounds in just a few years? Osborne isn’t thinking about the long term. Surely even he knows that the pension “freedoms” will for many people ultimately prove disastrous, but the implications will only become clear once he’s out of the game.

But he’s not daft. As with lifting restrictions on pension access, he knows that because few people actually understand that they’re getting tax relief on the money they pay into their pension, there’s little chance of a public backlash.

This could be easily rectified by rebranding pensions tax relief as a matching contribution from the government.

As it stands, however, Osborne’s case is supported by poor public understanding of how tax relief works. You could be cynical and suggest that the same lack of awareness would make it fairly easy for a future Chancellor to introduce some form of 
new tax on pension withdrawals in future, even if there were no tax relief on contributions.

So pension firms are finalising their case against changes that could kill their industry stone dead. The outcome will hopefully be a flat rate that brings an end to higher rate relief, which is little more than an industry subsidy and a tax break for the affluent.

But it’ll be the savings incentive to the Treasury that could be most decisive, and the industry knows it.

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