BUDGET speculation wouldn’t be the same without claims of a planned government “raid” on pensions tax breaks, writes Jeff Salway
I can’t remember the last time the pensions industry didn’t spend the weeks prior to a Budget pleading with the government not to scrap the relief paid on pension contributions by higher rate taxpayers.
I certainly can’t remember a time when they were this worried about the prospect.
They have more reason to be concerned than usual, however, because the proposal is being taken more seriously now. The Lib Dems in the coalition are pushing for it as part of a deal allowing the Chancellor to scrap the 50 per cent tax rate before the next election.
There’s a very valid argument that scrapping a tax relief that benefits only a minority of high earners can help pay for measures benefiting a greater number to a greater extent, such as a rise in the level at which people start paying income tax.
It’s been claimed that removing the higher rate relief would save the Exchequer more than £7 billion. If it were removed only from those earning more than £100,000 – which is more likely – the savings are still estimated at some £3.6bn.
Around 15 per cent of the total relief paid on contributions goes to a tiny minority in the 50 per cent tax band.
Not an attractive idea at the best of times, let alone when the government is subjecting thousands of disabled and unwell Scots to work reassessments, with the threat of losing the benefits on which they depend.
Last time I suggested that scrapping higher rate tax relief might be an idea whose time had come I was accused by one reader of being a Marxist.
My contacts in the pensions industry weren’t impressed either, and there’s sympathy for their argument. It is that an attack on pension tax relief undermines pension savings incentives at just the time when they are badly needed.
They also point out that the savings to the Treasury would be offset by the long-term impact of deterring people from investing in pensions.
In the short-term, there’s also the likelihood that more high earners would simply turn to salary sacrifice (where money is diverted from their pay into their pension) if it moves them out of the higher rate tax band.
There is a theory that salary sacrifice could be abolished alongside higher rate tax relief, but that would be far too complicated.
Another relevant problem is that it would represent yet more messing around with a pensions system that’s suffered from more tinkering in recent years than the Hibs back four.
Yet I’d counter that by pointing out that there are more effective ways of invigorating savings levels that produce a wider benefit and are not limited to pension vehicles.
Spending billions on a tax perk that benefits a demographic already disposed towards long-term savings is an inefficient, expensive way to promote a savings culture.
The problems we face over the coming years are the meagre pensions on which millions of workers will be retiring, exacerbated by poor value annuities that will give them too little return from a lifetime of saving.
In the longer term, we are heading for an even greater pensions crisis unless more is done to foster a savings culture among younger generations already bearing the brunt of an ageing demographic and the after- effects of economic turmoil.
As it happens, recent figures showed that for the first time in a decade more money went into individual savings accounts (Isas) than pensions last year. There are several ways of interpreting this, one being that it’s a vote in favour of the simplicity of Isas over the complexity of a pensions system in which trust has been badly eroded over the last 15 to 20 years.
But does this point to high earners losing tax relief at their marginal rate? For all the speculation and all the warnings from the pensions industry in recent weeks, the chances of a Tory-led government being the one to axe higher rate tax relief are very slim indeed. Even now, it would be a genuine surprise.