Rachel Reeves

Steve Webb

I am putting on my philosophical hat and reminding myself that pension tax-relief is supposed to be both an incentive to save for and to spend in retirement.

Turn the tap off for savers and you save too little, incentivised wealth creation and you spend too little. The trick is to get people saving and spending in a balanced way so that people have a means to maintain dignity throughout their later life.

The Financial Times this morning advises that tax incentives on saving are unlikely to be touched by a Chancellor keen to reduce the famous £22bn black hole she says she was bequeathed by her predecessor.  That means saying “no” to abolishing higher rate tax relief or even moving to an ISA like saving system as they have in Australia.

There is virtually zero chance she would do this, not only for philosophical reasons  but because it would be virtually impossible to implement at speed (see title of this blog and Ros Altman’s Money Mail article)

Steve Webb, showing his age (60 NB), gives another reason. Webb told the FT that cutting higher rate pension tax relief would hit a significant group of

“mid-ranking and senior public sector workers — a group which the government is unlikely to want to alienate”. (former MPs-Ed?)

If reform is based on not-alienating public servants (who are better served for pensions than any other group) then we might as well give up on progressive taxation.

Webb continues with a proposal for the current chancellor that she loads employer pension contributions with a 2% national insurance charge.

“The big advantage for the chancellor is that in most cases this would have no immediate pay packet effect on voters so would have lower political saliency. It could also be implemented relatively quickly,”

This flies against reason. The employer is the key to auto-enrolment as Webb knows. Taxing auto-enrolled pension contributions disincentivises employers from paying into the long-term savings plans that form the basis of the Chancellor’s productive finance initiative.

The Chancellor should not be thinking on taxing pension saving at all, if anything she should be thinking of ways to encourage it, by removing barriers (as the Tories did when they found a work round for the net pay problem).

Encouraging spending as pensions

The Chancellor has an alternative to taxing saving and that is to encourage the spending of savings as taxable income. There are two things you can do – easily and immediately.

1. You can limit tax-free cash to an amount that caps the benefit to pots or pensions worth £400,000. For DC that means a £400,000 pot and for DB pensions that means a £20,000 a year pension. That would broadly limit tax-free cash to £100,000 and it would simply be a reduction of the current cap of £268,275 which Chancellor Hunt implemented without a squeal from the public servants.
2. You can make all pension money remaining in a pot immediately liable to IHT. This would encourage people to swap pot for pension or annuity (encouraging savers to think about pensions as a wage for life),  put money back into the economy and make a substantial dent in the £22bn black hole.

Both the above are taxes on wealth and will be hated by the wealthy who have planned to use pensions as a means of capital extraction , arbitraging the less wealthy who pay their tax for them.

This is progressive taxation. It incentivises spending over time but keeps money invested rather than “cashed out”. It is easy to implement and it has to happen overnight to avoid a rush for the door to get tax-free cash.

It will mean that millions more will pay inheritance tax and that will be unpopular. But we are in the Chancellor’s “Overton Window“, she can do this now in a way she won’t be able to do it later in her term.

There are millions of people of Steve Webb and my age who are praying that the Chancellor leaves pension wealth alone and that she pulls up the drawbridge to keep our savings safe. But we are the lucky ones, the ones with the DB pensions, SERPS or personal pensions stuffed with NI rebates. We’ve benefited from 40 years of tax breaks and if we have to give back a few of the extra tax concessions we’ve been given but haven’t earned, we should not be overly concerned.

Those of us over 55 should worry  for generations that come behind; we should not be taxing their savings,  we should be bearing the burden of tax-cuts on our broad shoulders