We are in the midst of a general election and, naturally, there are all sorts of spending proposals flying around. Of course these proposals will need to be paid for, and it is worrying how frequently the idea of reducing pensions tax relief is being bandied around as a means of raising funds to pay for these new proposals.
This is not a party-political matter. Even parties that are not talking about cutting pensions tax relief are likely to be pushed in that direction if they get into power. When they are looking for ways to raise the money to realise the platform upon which they were elected, it will be too tempting to go for an idea for which the public has already been softened up by the constant chatter in the media.
This doesn’t augur well for the UK’s long-term strategy to tackle increasing longevity. Over the last two decades, the problems that will arise from an ageing population have been a crucial topic for each administration. The need for the public to get more involved in providing for their own future has been accepted by all major political parties, and each parliament has seen various measures put in place to encourage people to save more for the longer retirements that are being forecast by the specialists. One can agree, or disagree, with the various proposed solutions and regulatory changes, but at least each parliament was endeavouring to improve the situation.
The abandonment of pension tax relief would be a retrograde step. It has always been the case that one of the primary reasons that people, with money to invest, start by taking out a pension is the tax-effectiveness of the move. Indeed for lower and middle-income earners it is the primary slice of tax efficiency that they can undertake.
This was clearly recognised by all parties in their emphasis on the ‘free-money’ part of the auto-enrolment process as they encouraged lower-paid workers in particular not to opt-out. Whilst the thrust of the politico-media comment to date has been on reducing the availability of relief at the top rate, the very thought that the rules can be changed once the game has already started will undermine confidence in the government. If they can reduce it for top-rate earners now, what’s to stop a government in need of financial savings (which is almost all governments), reducing it for lower income people in a few years’ time?
Pension saving is a long-term goal and the key thing it requires is a stable environment. This change would put financial advisers and employers in a position where they have to let people know that their tax relief could be amended, reduced, or withdrawn at any moment. It undermines fairness as many people are already saving based on the plan that they will get full tax relief on the pensions. This idea will reduce confidence in pension savings, damage the pensions industry, and as a result put more pressure on future taxpayers when they have to support those who could have saved, but didn’t. When politicians talk about fairness in pensions, they need to take a long-term, multi-generational view.
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