As the Chancellor sits in his study in No. 11 and ponders the fate of the higher rate tax relief on pension contributions, you have to be a bit sympathetic to his dilemma. Overall his basic political philosophy would push him to encourage people to save for their own retirement provision. However, given the state of the economy, the pressure from the Treasury to take a short-term fiscal benefit by removing higher rate tax relief from pensions is very strong, because it is seen as an easy way of picking up an extra £2 billion.
At a time when the government is enforcing a ‘semi-compulsory’ pension saving system on the masses via the auto-enrolment project, it seems bizarre to be removing what has always been one of the best nudges to long-term retirement savings. Yet this is precisely what the Chancellor is being urged to do.
The vast amounts of money involved in the pensions area will always cause the Treasury to look enviously to see if there are ways to tap into it; this is what lay behind Gordon Brown’s raid on pension fund dividends, which played a significant part in undermining so many defined benefit schemes, as well as inflicting severe damage on the defined contribution sector.
Just because it is easy way to raise money does not mean it should happen. The government themselves are undertaking a major initiative to increase the level of retirement saving and they are sending out constant messages about the effect of increasing longevity on the ability of future governments to support pensioners.
What kind of message will it send to people if the government removes one of the key nudges that encourage people into saving via the pension system? What will be the effect if retirement savings drop or if the pension funds no longer have the resources for significant long-term investments?
Abolition of higher rate tax relief on pensions is a short-sighted policy based on the politics of envy, based on the assumption that anyone on the higher rate of tax must automatically have huge amounts of spare cash. Considering you only have to earn £42,475 to be liable for the higher tax rate, this view is ridiculous.
The abolition of higher rate tax relief will result in middle-income earners, already struggling, finding it much more difficult to provide for their own retirement. And if they don’t, then future taxpayers will ultimately have to pick up the bill.
The Chancellor must listen to advice from all shades of opinion when considering his budgetary options, but in this case he would do well to lash himself to the mast to avoid the lure of the siren song coming from those who see the prudence of others as an opportunity for easy pickings, and keep his eyes focused on the long-term direction pension policy needs to proceed in.