Some have compared it to a farce worthy of Alan Ayckbourn, others have condemned it as a missed opportunity. Whatever your opinion, the Chancellor’s U-turn on pensions reform is a blow for low income workers and a boost for middle-class savers.
Under proposals mooted by the government (and let’s not forget that they were no more than that – proposals), a radical shake-up of pensions was due to be unveiled in the Budget later this month. A raft of measures were under consideration but the one grabbing the headlines focused on a change to tax relief on pensions contributions.
Britain’s unwieldy pensions system has long been the subject of much debate, not least from successive governments, all of whom have pledged to ‘simplify’ and ‘streamline’. None have succeeded, despite millions spent on consultations, focus groups and industry panels. This time it looked like George Osborne might buck the trend and make a real change.
So, what was he planning to do? Let’s look at the current system first. At the moment, employees make pension contributions from their pre-tax income – so higher earners in effect receive tax relief worth 40 per cent or 45 per cent, but basic rate taxpayers just 20 per cent. One option under consideration had been to replace this tiered system with a flat rate of pension tax relief (25p or maybe 33p), which could have benefited basic rate taxpayers, but penalised higher earners.
Then there was the more contentious pensions Isa proposal. This would have removed upfront tax relief on all contributions in exchange for a pension pot entirely free of tax on retirement. Wealthy savers were even more unhappy about this. It would have cost higher rate taxpayers billions of pounds collectively.
As late as Friday morning, George Osborne looked set to stick to his guns and implement the biggest pensions overhaul in a generation. The liberal press were all for it and he even had a Thatcherite think tank on board. But he did not have the support of big business and, more crucially, members of his own government.
At at time when the Tory party is riven by divisions over Europe, the top brass cannot afford any more high profile rows. And so comments by pensions minister Ros Altmann to the Financial Times were the final nail in the coffin of pensions reform.
Lady Altmann said 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.’
There we have it. No radical pensions changes and no big announcement for Osborne in his March Budget. Nevertheless, I doubt we’ve heard the last of this. The government spends £50 billion a year on pensions tax relief. The desire to tinker with the system and reduce this bill will be hard to resist.