The pension system must be fair for all
Although the Autumn Budget is still more than four weeks away, rumours are rife that the Chancellor is contemplating an overhaul of the tax incentives available to pension savers. Perish the thought. No doubt, more complexity and greater confusion to put people off saving into a pension altogether. And, of course, more work for actuaries and financial advisers as they valiantly attempt to guide people through an even more intricate and complicated maze than is pensions jungle 2017.
Don’t believe me? Just think: annual allowance, lifetime allowance, tapering annual allowance, money purchase allowance, carry forward. Enough for any saver to go in search of paracetamol. We have been here before (and no doubt will be again in the near future) when it comes to politicians wishing to tinker with our pensions. Most notably so in early 2016 when the then Chancellor George Osborne abandoned a radical shake-up of the tax relief available on pension contributions for fear of upsetting ‘Middle England’ ahead of the Brexit vote. As we all now know, his pension U-turn failed to pacify sufficient people to keep the country within the European Union.
Eighteen months ago, all the talk was about Osborne turning pensions into pension Isas. Rather than receive tax relief on the way in as now happens, investors would make their pension contributions from taxed income with the promise that when it came to taking benefits they would be able to do so tax-free.
With tax relief on pension contributions currently costing £38 billion a year, this would have saved the Government an instant small fortune.
This idea now seems to have been kicked into the long grass. But it has not stopped Philip Hammond turning his beady eye towards pensions. He is now contemplating whether to skew the incentives to save into a pension in favour of the young. He could well do this by punishing the middle-aged.
This might be done in various ways. He could reduce the maximum annual contribution savers are allowed to make into a pension once they hit a certain age – 45 or 50 for example. This currently stands at £40,000 (inclusive of any employer contribution) although additional rate taxpayers already start losing part of the allowance according to how much they earn above £150,000. Alternatively, he could scrap both higher rate and additional rate relief on pension contributions for older people. These workers would then just be entitled to basic rate relief, irrespective of their income status.
As far as the young are concerned, he could then encourage them to save more (and vote for the Conservatives at the next Election) by introducing a higher starting level of relief – say 30 per cent, compared to the current 20 per cent.
Well intentioned though such a pension shake-up may appear – aimed at helping the young, already weighed down by student debt and struggling to get on the housing ladder – it would create more unfairness than it eliminated.
Older people are not a homogenous group who all have a history of consistent pension saving. Many have pension records blighted by periods of unemployment, looking after children and employment where an employer did not offer a pension (my first three jobs at a publisher, building society and newspaper respectively were pension-less). They should not be denied the right to make good their pension in later age.
As for the young, it is not pensions that they need help with. They have different priorities. They want to be able to carry minimal student debt into their working lives – and incur as little interest on it as possible. They also want more help when it comes to buying a home. If the Chancellor is keen to show he cares as much as Jeremy Corbyn claims he does about the young, he should think about cutting the 6.1 per cent rate on student debt and making the Lifetime Isa far more attractive.
If there is any overhauling of pensions to be done, it should surely be centred on making it all less complicated.
For a start, I would do away with the £1 million lifetime allowance which penalises prudence. I would also introduce a flat rate of relief (30 per cent) available to all. This in turn would allow the tapered annual allowance to be removed – a pernicious and bewildering restriction. All savers could then have the same annual pension allowance – preferably £40,000. That is what I call pension fairness.
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This article was written by Jeff Prestridge from Financial Mail on Sunday (Daily Mail) and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.