Question – when is a freedom a pension freedom?

Answer- when its got a big tax-bill attached!

The pensions minister Ros Altmann has said the government’s proposals to tax pensions in a similar way to individual savings accounts could be “dangerous” for retirees.

The intervention is a shot across the bows for George Osborne, coming just days after the chancellor launched a consultation on a radical overhaul of pensions tax relief.

Baroness Altmann, appointed by the Conservatives after the general election in May, said on Thursday that if pensions were taxed like Isas they would be too easy to spend, or could be taxed by a future government.

Mr Osborne announced in last week’s Summer Budget a consultation on radical options to tackle the £50bn a year cost of tax relief for retirement savings incentives.

He said he was “open to further radical change” and the idea that pensions could be taxed like Isas. That could mean that pension contributions are taxed upfront and then topped up by the government, while savings would be tax-free when taken.

This is the reverse of the current pensions taxation system, where tax relief is given upfront on contributions as an incentive to keep money locked away until the age of 55 at the minimum. At present retirement income is subjected to taxation when it is taken.

Baroness Altmann had argued for a shake-up of pensions tax relief before her appointment as minister in May.

In 2014 she wrote that Isa were “easier to understand and more user friendly for many savers” although they could add complexity to pension saving incentives.

It’s important to ensure money is kept in pensions for longer. If they’re Isas they are too easy to spend too soon, or be taxed by future Gov!– Baroness Ros Altmann, pensions minister

But on Thursday she said options for reform needed to be carefully considered. “I do fear that making pension withdrawals tax free at a relatively young age (60s and 70s is not old these days) offers dangerous incentives to stop locking the money in for later life,” she said. “Policy must be mindful of offering the right incentives not the wrong ones.”

In a series of tweets from her personal Twitter account, Baroness Altmann said that a “top up” for pension savings was needed to encourage people to put money in. “Just saving from taxed income isn’t attractive,” the minister said.

She said that people needed to be motivated to save for both the shorter term and the longer term. “It’s important to ensure money is kept in pensions for longer. If they’re Isas they are too easy to spend too soon, or be taxed by future Gov!,” she tweeted.

Last week the Treasury said it was keeping an “open mind” on options for reform. Baroness Altmann said she was not prejudging the outcome of the consultation, which runs for 12 weeks.

This from Jo Cumbo and the Financial Times pension team.

IMO; freedom means freedom; clearly Ros was happy with EET when it had a lock in annuity attached (see her 2002 blog). But things are a bit different when we live in TEE-land.

The caution is about the money running out. But let’s test this. Do people really need to be protected from blowing their pension savings early just because they can.

The Treasury are currently enjoying a windfall from muppets cashing in pensions early. But if people can take their cash early from a TEE pension scheme, they would still be muppets, they’d be taking their money from E to T.

All the stats on ISAs suggest that people do not like paying income tax or capital gains tax on their savings and investments. What makes Ros or the Treasury, or ordinary people think it might be a good idea to take cash out of a tax free account and into a taxed environment?

There’s a lovely story told by my friend Mark Scantlebury who was called in to advise a bank that was having a run on deposits in 2008. The bank thought they weren’t putting up enough of a fight and expected Mark and his company (Quietroom) to put up some exit barriers. Instead Mark suggested they told depositors they’d do everything they could to take their money away (without penalty).

Funnily enough, the depositors were so impressed by this attitude that they stopped taking their money away and started thinking through what they were doing. Presumably they thought this was pretty stupid as the bank reckoned this simple tactic of giving people what they wanted (choice) saved them £400m.