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MANIFESTO Savings

The press release that landed in my inbox earlier this week was crafted to worry readers out of their wits.  “Act now before tax attack on pensions, middle class savers warned,” a release from the DeVere Group warned me.  “Millions of people, who currently receive between 40 and 45 per cent relief could see a significant drop in their retirement funds,” it said, before going on to advise me to “take the tax relief while it lasts”.

One should this good advice if one can, and it is certainly true that fiscal drag is at work, hauling more people into the 40p band.  But since when has being a higher rate taxpayer defined being middle class?  Average earnings in Britain are about £26,000, well below the threshold for the 40p rate.  Lots of people who gain them would be surprised to be told that they are not middle class: many printers, speech therapists, nurses and so on.  At the foot of the press release, De Vere describes itself as “one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent and high-net-worth clients”.  Perhaps one cannot become middle class before first becoming high-net-worth.

But whether so or not, the warning was timely.  George Osborne is gearing up for pensions tax relief reform in the Budget.  There is a Treasury consultation.  There are reports of reduced reliefs.  The industry is being softened up.  Conservative MPs are anxious.  The right-of-centre press is opposed.  Hence that e-mailed press release and similar warnings, arriving in the in-box of a confirmed Tory voter near you.  Or on second thoughts perhaps not so confirmed.  Defined benefit pensions are dying out.  Rock-bottom interest rates (a rise has again been postponed) leave no incentive for thrift.  Last summer, the savings ratio fell to a record low.  And now the Chancellor is targeting buy-to-let.  “How on earth can I save if the Government won’t let me?” many of them will ask, and with reason.

None the less, as Michael Johnson put it last year on this site, “tax relief is first and foremost a core component of personal tax planning…rather than a saving incentive”.  In other words, the breaks are concentrated on people who already save rather than those that don’t.  Johnson’s work for the Centre for Policy Studies has been leading the way.  Mark Hoban, the former Financial Secretary to the Treasury, has also weighed in, writing that the reliefs “do not help those on lower incomes whose pension contributions are a bigger sacrifice”.  Their ideas differ in some respects, but both make the case for a single flat rate of relief at 33 per cent or thereabouts.  Such a simplification would arguably complement the new flat rate state pension and the sweeping away of the annuity requirement.

It would also help to tackle another problem.  Whether the matter at hand is buying a home, paying for university or saving for a pension, younger people get a worse deal than older ones did at the same age.  Furthermore, the latter vote more than the former – and are also more likely to vote Conservative.  So it is that NHS spending is ring-fenced and the state pension is triple-locked, intensifying the spending squeeze on other public services and spending.  Retired millionaries find themselves entitled to free bus passes, the winter fuel allowance and free TV licences while younger workers stump up for the taxes to pay for them, plug gaps in company pension schemes, fund social care and foot the bill for a National Health Service that they are less likely to use as often.

In the short term, high rates of immigration are a means of generating the tax receipts to help sustain this inter-generational unfairness – which, in the longer term, is not only unjust but unsustainable.  It is eating away at the post-war assumption that the lives of the next generation will be better than those of this one.  Osborne is at least trying to build more houses and thereby make them affordable.  One may argue that his analysis is wrong and his means are mistaken, but he recognises that lower home ownership means blunted aspirations and fewer Conservative voters (already apparent in London).  No doubt he will have a Budget trick to sweeten the pill in March – after all, he has a future leadership election to win – but he seems determined to act on pension reliefs.

Good for him.  To be sure, it would be contradictory for new incentives to save to be introduced while interest rates are kept artifically low.  And, as the ConservativeHome Manifesto argued, reworking tax incentives alone won’t revive a savings culture: privatisations should be targeted at ordinary savers, schools should be endowed through sponsorship money with investment portfolios and Ministers should mull the merits of a sovereign wealth fund.  Above all, the economy must be weaned off the drug of quantitative easing.  But the Chancellor and David Cameron have a political and moral choice to make.  Poorer and younger voters carried much of the work of deficit reduction.  Both social justice and political calculation cry out for recalibration.

After all, the mass of 40p taxpayers are concentrated in the deep blue south – not in the marginal midlands and northern seats the party needs to hold and win in 2020.  Perhaps Osborne is thinking that the next logical step in his changes is to ask: who needs pensions at all – as opposed, that is, to more flexible savings vehicles that a population with rising life and work expectancy can draw out of and pay into?  Maybe one catches a glimpse of a sweeping Tory tax simplification that can do for people’s savings what council house sales once did for home ownership.  But there is a fly in the ointment – and, no, I don’t just mean the row about how many people will lose out from the state pension reforms or the dispute over how effective workplace auto-enrollment will really be.

Incentivising poorer people to save is a good thing.  So is deficit reduction – and the Chancellor, being fenced in by his own ring-fencing, will be eyeing the £50 billion or so worth of tax reliefs.  But the two are not necessarily compatible.  The danger is that Osborne will raid the funds but not provide the incentives.  We don’t need to remind readers of Gordon Brown’s raid on pension funds in 1997, which speeded the collapse of those defined benefit pensions.

The Chancellor has already been nibbling away at the value of lifetime allowances.  Pensioners, savers and the industry want certainty and, with the prospect of Tory government post 2020, he has no excuse not to offer it.  But he has none, either, to shirk reform.  If he and Cameron mean what they say about One Nation, the Budget provides a chance to help prove it, however tetchy some papers or industry e-mails may get.

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