What a farce we have just witnessed on the so-called reform of pensions tax relief.
The unedifying image of the Chancellor announcing that changes to pension tax relief would now not be announced in the Budget, almost beggars belief. In other words, “we are telling you, a week before the Budget, that a major change we might have introduced is now not going to happen”.
I cannot recall another instance where a government has initiated and orchestrated such a strong case for reform, and then chickened out at the last minute. Just like the Grand Old Duke of York, he has marched his troops to the top of the hill and he has marched them down again.
However, before we get too carried away by this unexpected reprieve for higher-rate taxpayers, I suggest you look a bit more carefully at the announcement, which states that now is “not the right time” to be making changes. I believe the key element of the announcement is the emphasis on this not being “the right time”.
Call me cynical, but roughly translated this means “we really would like to have gone ahead with these changes, but we are trying to win the EU referendum so, politically, we cannot afford to upset anybody right now.
“Once that is out of the way we will dust off the proposals and make the changes we told you to expect in this Budget.”
At a practical level, it means that your higher-rate taxpaying clients are likely to be able to enjoy at least one more year of maximum tax relief on their retirement contributions. Given that you will have advised them to max out their contributions this year, you now have the opportunity to do the same in the next tax year, which should be doubly attractive to them.
It is ironic that the major effect of this pensions’ tax relief fiasco has been to cause people to accelerate their contributions. This is believed to have cost the Treasury more than £1.5bn in extra pensions tax relief, which will probably be repeated again next year.
The major effect of this pensions’ tax relief fiasco has been to cause people to accelerate their contributionsTurning to the possible reforms themselves, I cannot let this moment pass without highlighting the so-called ‘pension Isa’, which I believe would give pension savers the worst of all worlds. Towards the end of the consultation process, the idea that all pension tax relief would be scrapped, in favour of tax-free proceeds on a similar basis to an Isa, appeared to be gathering support.
Frankly, I cannot imagine a worse solution and, if it really was being given serious consideration, then perhaps it is a good job after all that the Chancellor marched his troops to the top of the hill and marched them down again.
Ken Davy is chairman of the SimplyBiz Group
