To rebalance public finances, the government is looking at a pension tax raid, the Telegraph reported earlier this week. Specifically, the Treasury could lower the lifetime allowance from just above £1 million to £900,000 or £800,000.
The Treasury is also reportedly considering setting a fixed rate of pension tax relief at 30% or setting new taxes on the amounts employers contribute to their workers’ pension pots.
Another pension tax raid option, reported by the Sunday Times, is to pause the pensions triple lock for a year – a political minefield if ever I saw one.
It’s worth adding here that Downing Street has insisted the government remains committed to the triple lock.
Whatever happens, expect screaming headlines from certain factions of the press. Pension taxation “raids” are never popular policies, but in this case, similar policies may be necessary to help to pay for the pandemic.
It’s well documented that the economic fallout of coronavirus has hit young people the hardest. Those in their early twenties or late teens are more likely to work in hospitality or retail – sectors hammered hard by virus-led lockdowns.
It was right to enact lockdowns as we had a moral duty to protect our most vulnerable. But unfortunately for many young people, it meant losing their jobs, struggling to find new jobs or being placed on furlough for months on end, all to stay away from a virus that, for the overwhelming majority, wouldn’t have made them more ill than a bad cold.
To be frank, they took one for the team.
On the other hand, pensioners were those in need of protection, and those most likely to be economically sheltered from Covid.
Under the rules of the triple lock – which uprates the state pension in line with the greatest of Consumer Prices Index (CPI) inflation, average earnings or 2.5% – retirees could even find themselves benefiting financially from the pandemic. That’s because, thanks to low-income job losses, the average salary has gone up nearly 6% this year.
I don’t think it’s controversial to suggest that, having slowed down the economy to protect them, we ask the elderly to contribute a little more to the UK’s financial recovery.
That’s the basic and most simple argument, anyway, but the problem with pensions legislation is that nothing is ever quite as straightforward as it first appears.
Take the triple lock, for example – a policy I have long considered grossly unfair for younger generations to shoulder the burden of, and one I am convinced only remains in play because it’s a vote winner for the Conservatives.
Thanks to the triple lock, while workers’ wages have stagnated for the last decade, pensioners have been getting a yearly income boost.
But then again, the triple lock exists to boost the UK’s state pension, which happens to be one of the least generous in the developed world.
Most pensioners aren’t swanning about on cruises, and far too many are living in poverty. The triple lock absolutely needs reform, but to me, it sounds like how the state pension is calculated needs a re-think, too.
The triple lock has been a long-term discussion point and one I imagine isn’t going anywhere. Less revolutionary ideas like cutting the lifetime allowance (LTA) – the amount you can save into a pension overall before being taxed – feel somehow more palatable to older generations but are also not without their problems.
£800,000 sounds like an extraordinary amount of money, but while it’s certainly more than the average person retires with, it’s not as flashy as it seems when you consider what sort of annuity it might buy.
LEBC’s Kay Ingram estimated an £800,000 defined contribution pension pot would buy an annuity worth around £29,000 per year – less than the average UK wage.
Not only that, but when you take into account inflation, the LTA is constantly decreasing in real terms.
There’s an argument that suggests decreasing the LTA punishes those who have diligently saved for retirement. If pension taxation became a less attractive prospect, perhaps savers would be put off – and that’s the last thing we need.
There are issues, too, with the other rumoured options. According to AJ Bell’s Tom Selby, a flat rate of pension tax relief would present a genuine practical challenge, and likely result in tax rises for public sector workers in defined benefit (final salary) pension schemes, like NHS workers. At the same time, employers would be “furious” if the government increased their pension costs.
Ideologically, of course, I’m less sympathetic towards corporations complaining about spending more money on workers’ pensions. Still, I’m also not naïve enough to think such a scenario couldn’t come with its own raft of unintended consequences.
Borrowing hit £300bn last year thanks to Covid, and it looks like the government is set to borrow hundreds of billions more this year.
Such times of crisis require creative thinking, so perhaps it’s best not to introduce a pension tax raid and instead consider a wealth tax on the super-rich or find a way to tax corporations like Amazon that have benefitted disproportionally from Covid-19.