A deceptive headline

If the wealthy readership of the FT are contemplating this headline with smug satisfaction, they had better read Jo Cumbo and George Parker’s article in full.

Restructuring tax relief is not going to happen, not because ideologically Rachel Reeves doesn’t want it to happen (she’s said she’d prefer flat rate tax relief at source at 33%), but because changing taxation eats up too much political and operational bandwidth to commit to at an early stage of what could be a long spell in Government.

There is one small adjustment to the taxation of contributions going through HMRC now – the net pay anomaly is being put right and should be good to go for 2025. Meetings between the net pay anomaly group and HMRC have been delayed because of purdah and we still don’t know how the Treasury are going to communicate the tax rebates to be paid to over a million low earners next year, but it will have taken 6 years since the manifesto pledge, to implementation. Other management pledges , such as the reform of the use of ground rents never got that far.

But what Cumbo and Parker’s article makes clear is that the Labour party has not dropped its commitment to reimpose a Lifetime Allowance wealth tax on pensions – a wealth tax that was dropped in Jeremy Hunt’s first budget. The FT spell this out.

Labour has already pledged to reintroduce the lifetime allowance, or the cap on what can be saved in a pension and benefit from tax relief.

Several people I have spoken to close to the Labour policy team have told me that Labour intends to review pension taxation in the early days of Government with a view to making sense of a system that is increasingly supporting wealth management rather than “insurance against living too long”. The IFS have recently published their proposals for the reformation of pension taxation, which I blogged on earlier this week.

The proposals of the IFS would go much further than the reinstatement of the LTA and would abolish the exemption on pension wealth from counting as part of the estate of someone who has not spent their pension on an annuity, drawn down their pot to nothing or had been being paid a pension from a defined benefit plan.

This would be a much greater wealth tax than the original LTA and could force radically different behaviours from the wealthy, for whom pensions are a form of IHT mitigation.

One of the “no-brainer” arguments for the taking of Cash Equivalent Transfer Values from DB pensions was that you can’t take a DB pension to your kids when you go – whereas a DC pot can be  inherited by whoever you choose. This led to billions of pounds being removed from the pension system to wealth management.

If the only people who had transferred from pension to wealth had been the already wealthy, then we would not look back at the BSPS time to choose as a social problem. But the FCA reckoned that over 40% of the transfers made were not in the interests of members, largely because they recognised the long-term utility of a wage for life over the short-term utility of a well-hung SIPP.

The proper debate over pension taxation has moved from the allocation of tax relief on contributions (we may come back to this in time) to a debate on the taxation of retirement wealth.  There needs to be a fundamental review of the working of the pension taxation system which needs to consider what ordinary people are actually doing with their retirement savings whether they are in personal pensions or master trusts. We need to be asking whether we are encouraging people to become wealth managers or pensioners.

A relatively small proportion of those reaching 55 will relish the prospect of managing their own wealth – with or without an adviser. Figures suggest that around two thirds of people would rather have a pension paid to them by their pot as if they were in a DB pension. But the pension taxation system is so biased in favour of “inheritable wealth” that even those who have no prospect of paying inheritance tax, are beguiled into believing that pension saving is better left alone.

As the Australian Government has found, the problem is not “double dipping” (running down savings to go on the social) but hoarding (saving not spending pension pots).

Rachel Reeves is unlikely to revisit tax relief on pension contributions, but she is committed to reform the mess surrounding taxation of pension wealth on death.

The FT has rightly highlighted the exclusion of pension taxation from Starmer’s list of tax-exemptions and questioned it.

Labour is not ruling out changes to pension taxation  – whatever the sub’s headline might suggest!

I suspect that Labour’s  policy intent,  like that of the Australian Retirement Income Covenant, will be to promote pensions over wealth maintenance. That could mean an inheritance tax on pension wrapped wealth.