Will the Eeyore Chancellor raid YOUR pension?
Fears glum-bucket Chancellor could cut up to £39 billion in relief - enraging millions of Tory voters
FOR nigh on 100 years, governments of all colours and persuasions have encouraged us to save for our retirement. A bit of tax relief, the occasional savings allowance thrown in for good measure and tax- free investment plans galore. All welcome as far as savers are concerned, but also vital from a political point of view. After all, it is in the best interests of all governments – Left or Right, red or blue – to ensure as many people as possible reach later life in rude financial health so they do not become a burden on the State.
The most advantageous of these tax sweeteners by a country mile is tax relief on pension contributions. Put £100 into a works or personal pension every month as a basic rate taxpayer and it will only cost you £80. Even better, if you are a higher rate taxpayer, the same £100 only costs you £60. There is no more tax advantageous way to save for retirement although once you start to take income from a pension, you will likely have to pay tax on it – that is after exercising your right to take 25 per cent of the pension pot as tax-free cash.
Very generous but, from the Government’s point of view, expensive. Indeed ‘eye-wateringly expensive’, in the words of Philip Hammond, the Chancellor dubbed Eeyore for his gloomy demeanour. According to the Treasury, tax relief costs the Government a cool £39 billion a year. A cost that some now believe is excessive, especially when the Government soon needs to conjure up the £20 billion-a-year of extra money it has promised to keep the National Health Service chugging along.
With the Chancellor’s Budget now only eight days away, speculation has mounted that Hammond is planning a pensions tax raid to claw back a slice of that £39 billion.
Nothing new there – in recent years, Chancellors from Gordon Brown to George Osborne have conducted similar raiding missions. But Hammond could be the one who does the unthinkable and ends higher rate tax relief. Osborne toyed with this radical idea in the run-up to his March 2016 Budget but, fearing a Middle England backlash ahead of the Brexit vote, backed off at the last moment. This time around, Hammond could hide behind the NHS shield and go ahead with such a plan even though in doing so he would provoke widespread opprobrium.
Ironically, such a move would probably draw the loudest praise from the usually snarling individual facing him in the House of Commons, Shadow Chancellor John McDonnell. He has long called for higher rate tax relief to be abolished on grounds of fairness. Back in 2016, when Osborne backtracked from axeing higher rate relief, McDonnell accused him of ‘putting the interest of his party ahead of those of our country’.
So will he? Won’t he? Or will Hammond do what most Chancellors end up doing, which is to tinker with the pension rules rather than risk a tax grab which could prove the final nail in the Tory coffin? Here are the choices he’ll be considering...
OPTION ONE NUCLEAR
THE most radical move would be to axe all tax relief on pension contributions from the start of the new tax year, April 6, 2019. To sweeten this toxic pill, Hammond could then allow all withdrawals post age 55 – the age at which most pensions can now be accessed – to be free of tax.
In effect, he would turn pensions into a clone of Isa – with contributions paid from net pay. The only difference, apart from the age 55 ruling, would be that in the case of the pension Isa, contributions could be topped up by an employer.
It was an option entertained by Osborne before he got the Brexit willies. Possible? Yes – it would save Hammond a small fortune straightaway – although the quid pro quo would be a loss in future taxation on retirement income.
Likely? Not in a million years. A nightmare to implement, too explosive and probably the death knell not just for pensions but a Conservative Government hoping to be returned at the next Election.
OPTION TWO NUCLEAR LITE
NOT far behind in terms of radicalness – and propensity to upset Tory voters – would be for Hammond to axe 40 per cent higher rate tax relief