Pension tax reform: the race is still on

The Chancellor’s surprise briefing through trusted allies that “there won’t be any changes in pension tax relief at all in the Budget” is far from the end of the story.  

For this Budget at least, the field has changed and the political factors that have delayed pensions tax reform, might yet contribute to some “good news” surprises on wider pensions and savings.

Longer term, the tax reform race is still on. It is now quite plausible for the Chancellor to announce a period of internal review and reflection by HM Treasury, while continuing to refine the flat rate relief and ISA-style ideas.  The promise of no change only refers to the current Budget.

Last summer’s consultation “Strengthening the incentive to save: a consultation on pensions tax relief” was always an open field for wider saving ideas, but punters and pundits focused almost exclusively on two horses thought to be the stewards’ favourites, flat rate relief and ISA-style pension savings.

As the political going became harder, with MPs realising the effects on their constituents and the Brexit referendum needing ministers’ priority, no-one noticed a dark horse coming up on the inside – the status quo.

Given the Chancellor’s indirect statement it would now be surprising if any worsening of pension tax relief occurred in the forthcoming Budget on 16 March. Keeping the status quo, which as recently as February was a rank outsider, has now firmly taken the lead.  But for how long?

Who are the new runners and riders?

More intriguingly, the political factors keeping further pensions tax change off the agenda could now bring more “good news” pensions ideas into the race.  

For example, the Chancellor wants to increase incentives to save and, for younger people, a key challenge is to manage the tension between saving for a pension and saving for a deposit on a first home (which currently must be done using savings vehicles that do not attract employer contributions).

Some countries allow individuals to make withdrawals from a “pension” fund at a young age specifically for this purpose. If applied to the existing UK pensions framework this would benefit young people by effectively allowing them to save for a house, while also benefiting from employer contributions (and replicating one of the potential advantages of the pensions ISA idea previously being considered).

Withdrawals would likely be strictly limited (e.g. to £50,000) but taxed in a similar way to current withdrawals from age 55, thereby raising immediate revenue for the Chancellor.

For older workers, a clear option for the Chancellor is to address the growing concern of the impact of rapid increases to state pension age for women born between April 1953 and April 1956, who were doubly caught by plans to equalise the state pension age for men and women and also increase state pension age from 65 to 66.

Having recently appointed John Cridland to review wider issues around state pension age, addressing this perceived inequality could be a starting point for the Chancellor in this Budget. Allowing the female state pension age to increase slightly more slowly towards the target age of 66 would ease this transition.

Whatever the Chancellor ultimately announces, for this budget at least the field is now clear, if he wishes, for some surprise new runners and riders.

Tim Sexton

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