Summing up: Strong case to cut pensions tax relief

The coalition’s fondness for U-turns, typically arising from its incompetence, means we can take with a pinch of salt the insistence earlier this year that it wouldn’t mess with pension tax relief again.

The rumour is that the amount that can be saved annually into a pension and attract tax relief will be slashed from £50,000 a year to £40,000 or even £30,000 in the forthcoming autumn statement. It’s estimated that such measures would save the government £600 million and £1.8bn respectively. The £50,000-a-year threshold was introduced in the 2010 emergency Budget, when Chancellor George Osborne lowered it from £255,000.

Warnings of a threat to pensions tax relief are issued prior to every single budget or autumn statement (what used to be the pre-budget report, effectively). It’s all part of the circus, as providers and advisers urge clients to maximise their contributions while stocks last. It’s an empty threat, but a convenient and often lucrative one.

So why should we take rumours of a hit on pensions tax relief more seriously this time around? What’s changing is that the argument against is getting weaker – and the industry knows it.

Its case for protecting pensions tax relief is well rehearsed, including the claim that reducing pensions tax relief would further damage final salary schemes. Given that these are well down the path to extinction in the private sector, and that a fresh limit on tax relief would be the least of the problems for employers still offering final salary pensions, this is a distinctly weak argument.

Pension firms also, quite correctly, point out that very uncertainty created by constant tinkering with pensions causes the greatest damage. But they should be wary of over-playing this when one way of ending the bi-annual fluster over tax relief is to do away with it altogether. That’s highly unlikely, not least because it would also mean having to end or severely restrict salary sacrifice arrangements; not  a smart move, nor a realistic one .

Then there’s the fact that the tax perk is the main advantage of pensions. Dilute it and the decline of the UK pensions system will accelerate. But confidence in that system is already desperately low, and while automatic enrolment into workplace pensions will buck the trend, long-term saving these days is about more than pensions.

If Osborne is ready to incur the wrath of the industry and high earners, he’d do well to balance an attack on pensions tax relief with a boost for other long-term savings vehicles. A sizeable increase in the annual tax-free Individual Savings Account allowance is an obvious measure. Not only would it benefit far more people, but it would be a timely shot in the arm for long-suffering cash savers.

Targeting tax relief would generate hefty savings for government coffers at the expense of middle and high earners at a time when vulnerable people are dying as a direct result of its misguided spending cuts. It’s time for the pain to be spread more evenly.

The debate over pensions tax relief rears its ugly head at least twice a year. The instinct is usually to dismiss it, particularly when a Tory Chancellor holds the purse strings.

But the argument in favour of curtailing this expensive tax break grows more compelling by the year.

Twitter: @vaughansalway