It was all a bit of a damp squib in the end.
I’m not talking about this morning’s (20 March) solar eclipse - although for those of us in London at least, that was too a massive anticlimax - but George Osborne’s final pre-election Budget.
The fireworks of last year’s annuities bombshell were replaced by some thinly-veiled electioneering, a lot of fiscal engineering, and a few minor giveaways designed to build on the chancellor’s self-proclaimed ‘savings revolution’.
Oh, and an ill-conceived pensions tax raid that makes a mockery of this drive to get people saving for the longer term. Don’t forget that.
For what the good Lord Gideon giveth, he taketh away. Having announced a new allowance to lift the modest savings of most out of tax, alongside further tweaks to Isas to ease access restrictions and help those saving for a house deposit, he offset this generosity with a cut in the pensions lifetime allowance.
The amount you can amass into a tax-relieved pension fund will be capped from next year at £1m, down from £1.25m. There will be ‘transitional protection’ for those with savings above this level already and long overdue indexation will be introduced from 2018.
It’ll transfer about £600m from a rapidly escalating pension tax relief bill back to the Treasury, but it’s priceless to the Tories in that it was one of several measures designed to blunt effective Labour attacks, in this case that the government has disproportionately helped the rich and the old.
Poppycock. It actually has the effect of undoing good work to incentivise saving from a younger age and reduce complexity in the pension system.
Even the ‘transitional protection’ should send a cold shiver down the spine of most advisersI understand that the books need to be balanced. It’s a fact that the pension tax bill has grown by £4bn a year in this parliament, with higher rate taxpayers benefitting more than most by claiming three-quarters of the relief for making half of the contributions.
A number of experts, as well as the Liberal Democrat pension minister Steve Webb, have called for a flat rate annual allowance to fix the problem, while actually abolishing the clumsy lifetime allowance.
Depending on where the flat rate was set, this too would have reduced the tax relief paid, while removing the arbitrage benefit for those that currently defer tax at the higher rate, only to later pay it on their lower retirement income at the basic rate.
Instead, we have a policy which experts reckon in no time will limit the eventual income an individual can take in retirement to sub-£30,000. Indexation will ameliorate the situation to a degree, but increasing the threshold at a targeted 2 per cent when most funds aim for growth well in excess of this is cold comfort.
Even the ‘transitional protection’ should send a cold shiver down the spine of most advisers, who’ll have to explain to confused clients how pension saving limits operate.
After nine changes to allowances in nine years, we’ve seen the lifetime allowance yo-yo up to £1.8m before falling back from whence it came. This new protection will make a total of six in use, joining primary protection, enhanced protection, fixed protections 2012 and 2014, and individual protection.
Horrendous complexity; a clumsy tax raid; ceilings on the amounts you can save which punish the compounding benefits of starting earlier. There is no redeeming feature to this policy.
And that is what this is: pure politics. It’s worked well for Mr Osborne in the past, such as when he sought to take the steam out of a Labour charge, following a pledge to introduce a ‘mansion tax’ with a far more elegant progressive reform of Stamp Duty at the Autumn Statement.
Or at this very Budget, when in a feat of political prestidigitation he claimed improvements in borrowing and growth figures would be used to pay down debt, while turning a previously pledged £23bn surplus into a £7bn surplus; with even this achieved in part through £13bn of asset sales.
With a wave of his Budget box he therefore changed a public service time warp to come, from a journey to the stark 1930s to the much more genial 2000s. Fair enough - and ultimately the right call.
My issue with the lifetime allowance policy is that unlike these measures, it doesn’t fit the narrative and actually undermines what the government and industry are trying to achieve. It was no less than the ‘gimmick’ George promised we wouldn’t get.
ashley.wassall@ft.com
