George Osborne has been forced to abandon a package of pension reforms, including reducing tax relief for higher earners, amid growing concern that their introduction could have prompted a backlash from affluent voters.
With less than a fortnight to go before the budget, Treasury insiders took the rare step on Friday of ruling out changes that had been mooted. The proposals had included the more radical option of creating a “pensions Isa” that would have eliminated pension tax relief for all those in work.
Both options were set out in a consultation paper published last summer and the chancellor was due to announce his decision in the budget. But with nervousness in Conservative ranks about the changes growing, an ally of the chancellor said: “There won’t be any changes to tax relief at all in the budget. George has always been clear he wouldn’t do anything to damage saving. The pensions consultation has been open-ended, to look at how the system is working. He’s listened to what people have said and concluded that now isn’t the right time – with uncertainty in the global economy and reforms such as auto-enrolment still bedding in – to turn things on their head.”
Osborne is understood to have become concerned that speculation about how he might reshape pensions in the budget had begun to run out of control, amid a growing number of speculative press reports, culminating in pensions minister Ros Altmann warning against the changes on Thursday.
Lady Altmann told the Financial Times that she feared making pensions tax-free would increase the risk that people retiring would blow their whole pension pot. “The freedom and choice reforms have put us in a place where people’s pensions can work well for them. However, tax is a natural brake on them spending their pension fund too soon,” she said.
Garnier emphasised that it was “slightly strange how the story had escalated, [Osborne] was looking at options and decided that the time is not right.” He added, however, that there was an opportunity to have a fundamental rehash of the pensions system, particularly for those in their 20s and below.
“If you look at where the problems lie, you’ve got lower-income workers, you’ve got people on different types of contracts, you’ve got people who pay no tax at all who get no tax relief, at the same time if you’re a 21- or 22-year-old and you’re not saving for your pension, it’s too far away, you’re struggling to put money aside for your mortgage.
“I think what we should have is a system that would take into account the big ticket items in your life. A 22-year-old has student debt, is trying to put some money aside for a mortgage, and at the same time we’re expecting them to put as much money as they can, as early as they can, into a pension.”
Under the current system, employees make pension contributions from their pre-tax income – so higher earners in effect receive tax relief worth 40%, but basic rate taxpayers just 20%. One option under consideration had been to replace this tiered system with a flat rate of pension tax relief, which could have benefited basic rate taxpayers, but penalised higher earners.
The more radical proposal of a pensions Isa, which Osborne saw as the culmination of his project to hand savers complete control over their retirement savings, would have removed upfront tax relief on all contributions – for both the basic and higher rate – in return for a promise that the whole pension pot could be drawn down tax-free on retirement. This idea was strongly backed by Thatcherite thinktank the Centre for Policy Studies, which has urged Osborne to stick to his guns.
The pensions Isa plan would have provided a welcome boost to Treasury coffers in the short term, by removing tax relief on pension contributions, which is estimated to cost £21bn a year. But the government would then have faced higher costs in the coming decades as users of the new system retired.
Mick McAteer, director of the Financial Inclusion Centre, said on Saturday that scrapping pensions reforms was a missed opportunity. He told Today: “UK households have around £4.8tn-worth of private pension wealth, the top 20% of those households own about £3.4tn of that wealth, so if you have 10 people in a room, two of those people have more than twice the pension wealth than the other eight put together.
“We have a clear inequality in our pensions system, and this is a really disappointing piece of news, because this was a great opportunity to actually make the pensions system work better for the self-employed, people on zero-hours contracts who are really facing a long-term pensions crisis. Fewer than one in five of the self-employed are currently contributing to a pension at the moment, that’s down from a figure of 60% back in the late 1990s.”
The decision will also inevitably be seen in the context of Osborne’s hopes of succeeding David Cameron as prime minister, after Boris Johnson’s decision to back Brexit cemented his appeal with grassroots Tory party members.
Source : The Guardian