The call by Mark Wadsworth last Tuesday on ConHome to scrap pension tax relief for higher rate taxpayers should be ignored by George Osborne. Mark’s arguments don’t stack up in the real world – and scrapping higher rate relief would hit middle-earners and entrepreneurs hard.
Most people who benefit from the higher rate tax relief are not rich. Four-fifths of them earn between £42k and £107k. Okay, so that doesn’t make them poor, but they’re not swilling champagne and jetting off holiday all the time either. They are the back-bone of the UK economy. Reducing the lifetime allowance on pensions savings could see entrepreneurs facing a ridiculous 55% tax. People like my dad, who has worked hard all his life, for various companies, and has now built up his own small business that employs a couple of people. My sister and I are grown-up, and he’s at the stage when he doesn’t have the demands on his wallet that he did for most of his working life. Instead he can look to the future and try to save more. Why not let him keep a bit more of the money he earns now so that he can have a better retirement and not rely on the state? He’s precisely the kind of person the Conservatives ought to be backing, not kicking.
The higher rate relief encourages people to save, contrary to the arguments that Mark Wadsworth makes. The report on pension fees by Dr Christopher Sier and David Norman that he cites has been heavily criticised and all its figures disputed vehemently by the asset management industry. The market works to force costs down and the industry itself is opening up the fees structure so that consumers can more easily make up their own minds. But – and it is a big but – even if the fees paid to insurers did match the tax relief savers receive, it is still a boost to long-term saving. Pension funds aren’t free to manage; they need to be paid for. If savers get help paying the fees then they’ll be able to save more.
Mark Wadsworth would like to see all pension tax relief removed (including that which goes to the 12 million basic rate pension savers) and the money used to get rid of the 50p tax rate – with a flat rate tax of 34% introduced. That’s all well and good, but let’s be honest: the Chancellor won’t be bringing in a flat tax next week. If he removes the relief it will be because of Liberal Democrat pressure given it is a manifesto commitment for them. It is not a simplification measure. If George Osborne does scrap the 50p tax rate at the same time at scrapping the tax relief, an example of Gordon Brown-like tinkering if ever there was one, he will not be encouraging long-term savings in the way tax relief does at the moment. People would get more money now, but they’d spend it now too.
I’d also like to take issue with the idea that the pensions industry could run out of opportunities to invest by pointing out that the insurance and pensions industry is a global one. It’s outward looking and gets 28% of its net premium income from overseas business. It can, and does, invest in more than just UK investments (which Osborne is asking it to do more of). It is perfectly capable of receiving extra money from UK savers and helping those savings grow so that people have an income when they retire.
The tax relief as it currently stands encourages savings and is fair. As Peter Lilley and others have noted people defer tax now and pay it when they retire instead. It provides an incentive for people to defer gratification and plan for their future. Changing the rules so that they pay twice – once now, once later – would destroy that incentive. The Conservatives ought to be looking out for responsible people who are thinking about how to provide for themselves rather than relying on the state.
The UK has an ageing population that needs to save more, not less, and the Government is bringing in auto-enrolment later on this year in an effort to encourage that. It would be perverse if the Government was then to send out the signal that pensions do not matter. That saving shouldn’t be encouraged. It is imperative that the Chancellor resists calls – from the Libdems, Labour or even Conservatives – to change the pension tax relief in next week’s budget.