Politics and pensions have always been uneasy bedfellows says Tom Selby of A.J. Bell, but does the Government’s recent U-turn on changes to the National Insurance contributions for the self-employed mean that we have to brace ourselves for yet more changes to pension legislation?
Politics by its nature is a short-term game, driven by five-year election cycles and a desire to improve the lot of voters today. Pensions as we know, are long-term, with savers asked to lock their money away until at least the age of 55 and trust that the Government won’t shift the goalposts in the meantime.
This tension is enhanced by the sheer volume of cash which is up for grabs through pension tax relief. The latest Government estimates suggest that almost £40bn a year is spent incentivising people to save in pensions – although this doesn’t take into account the tax taken at the other end on withdrawals. This sum will only grow as automatic enrolment brings millions more people into the pension system.
Constant tinkering
Successive Chancellors have been unable to resist tinkering with pension tax relief to boost Treasury coffers. George Osborne cut the annual allowance twice and the lifetime allowance three times between 2010 and 2015. He also created the horrifically complex annual allowance taper, which gradually reduces pension tax relief from £40,000 for those with total earnings below £150,000 to £10,000 for those with earnings above £210,000.
Early evidence from his successor, Philip Hammond, suggests this chaotic approach to pension tax policymaking might continue. In the 2016 Autumn Statement – his first major set-piece as Chancellor – Hammond took the axe to the Money Purchase Annual Allowance (MPAA), another Osborne invention designed to prevent people using the pension freedoms to get a double bubble on tax-free cash.
Without any evidence of abuse, Hammond announced the MPAA would drop from £10,000 to just £4,000 from April 2017.
Plugging the black hole
And things could be about to get worse. If national newspaper reports are to be believed, and of course depending on the result of a certain election on June 8th, Hammond is planning yet another pensions tax– possibly cutting the annual allowance again – in order to plug the £2bn black hole left by his bungled attempt to raise National Insurance contributions for the self-employed.
Let’s just take a moment to unpick exactly what is being discussed here – a permanent reduction in annual savings incentives to bridge a temporary gap in public finances created by the Chancellor’s own error.
Remember that the only reason the Conservatives U-turned on the NICs increase for the self-employed was because it broke a manifesto pledge. The Government still, rightly in my view, wants to pursue the policy – and presumably will if, as expected, the Conservatives claim a landslide victory in the snap General Election this June.
Never has the Treasury’s dismissive attitude to the corrosive impact of constant tinkering driven by short-termism been more nakedly exposed than here.
Radical reform shelved
While more unwelcome cuts to the annual allowance may be on the cards in the next Budget, the Treasury has at least backed away from plans to introduce a ‘Pension ISA’ first outlined by the Government in 2015.
Under the proposal, the pension tax system would have been flipped on its head so that withdrawals – rather than contributions – were free of tax. This proposition undoubtedly appealed to Treasury bean counters keen to engineer a short-term cash boost.
This would have been hugely damaging to saving in the UK and risked undoing the early good work of automatic enrolment. How could savers be expected to lock away their money for decades without an upfront tax incentive to do so? If contributions were taxed, who’s to say a future Government won’t swoop in and tax withdrawals too?
Thankfully, Treasury financial secretary Jane Ellison has ruled out pursuing this reform.
In a letter to my boss, Andy Bell, she said: “As you are aware, an extensive consultation was conducted last year which considered changes to the pensions tax framework. This concluded that now is not the right time to undertake significant reform.”
Ellison has also suggested the Government plans to take a more measured approach to tax policy in general.
In a speech in January, she said: “The most common ask of us was that we maintain a steady, predictable tax regime that people could plan around.
“They wanted sensible, workmanlike adjustments that provide certainty – or indeed no change at all if that’s the wisest course.
“And that’s the style this Government wants to adopt.”
On pensions, however, the Treasury is failing to heed its own mantra.
It is accepted across the both the industry and the political spectrum that 8% – the minimum contribution under automatic enrolment from 2019 – is not enough for most people to enjoy a decent retirement.
To encourage people to go over and above this level, the Government needs to make a firm commitment not to constantly shift the earth beneath their feet.
About Tom Selby
Tom Selby is senior analyst at A.J. Bell. He is an award-winning former journalist specialising in pensions and financial services. He began his career at Professional Pensions in 2009 before joining Money Marketing in 2010. Tom became Money Marketing head of news in 2014 and joined AJ Bell as senior analyst in 2016. He has a degree in Economics from the University of Newcastle.
