For as long as I’ve been advising on pensions, the weeks running up to the budget have been filled with rumours of draconian reductions in the subsidies available to the rich to featherbed their retirement.
This FT story has the Chancellor restricting tax relief to 20%, which has been discussed ad infinitum on social media but which is easier to talk about than do.
The only way you can do this is to take away tax relief altogether and replace it with a flat rate incentive, which – while it feels like the same thing, is quite different. There are implications for national insurance which is almost as big a tax for employers as corporation tax.
Many employers already operate non contributory schemes and many more operate salary sacrifice schemes which allow staff to choose to swap salary for pension to reduce national insurance. If the Chancellor isn’t very careful, he risks driving all fully-witted employers towards salary sacrifice.
The mechanisms around paying pensions are complicated and I doubt that there is sufficient resource within the Treasury to properly model the cost of the mooted switch to a flat rate contribution of 20% by March. Get this wrong and Sajid Javid and the Treasury risk a humiliating climb down , akin to that suffered by his predecessor over social care.
So why the FT story?
The FT do not fly kites, my sources tell me that there is a working party in the Treasury who are working on reforms to the pension incentive system that costs close to £40bn a year. But you’d expect that. There is clearly not enough in the piggy bank to pay for the extravagant promises of the Conservative manifesto without breaking the tight rules set on borrowing, the only alternative to borrowing more, is taxing more and squeezing pension tax reliefs is the easiest policy to justify in terms of social equality. 50% of that £40bn goes to the 10% highest earners.
The alternative to taxing us more on contributions is to tax investment growth or reduce the twin perks at retirement – the 25% tax free cash sum and the break that allows us to get pension income free of national insurance payments. I suspect that there’s sufficient financial planning based on the tax free sum for it be considered an entitlement. It is hard to take away what is considered an entitlement using a cliff edge. Anything other than a cliff-edge cut would see the immediate cashing out of remaining tax-free cash accross the board, leading to chaos and justified accusations of financial vandalism.
Extending the scope of national insurance to cover pensions in payment looks a more likely means of recovering some of that £40bn.
Rather than consider the FT story as idle speculation on a quiet Friday, I’d see it as the first stage in the softening up of the FT readership to a consultation process that will result in an announcement in the autumn budget. There is presumably enough juice left in the plans that were ditched in 2016 when the Daily Mail told George Osborne he wouldn’t have a back-bench to support him if he pressed ahead.