A ‘Pension Isa’ is still highly likely to become a reality, despite the departure of its cheerleader George Osborne from the Treasury, according to the policy’s architect.
Michael Johnson, a pension expert at freemarket think tank the Centre for Policy Studies, told FTAdviser that prime minister Theresa May’s decision to sack Mr Osborne - who had been heavily in favour of the policy - made no difference.
When asked whether the Pension Isa was off the table, Mr Johnson replied, “Not at all. I think it will happen.”
However he declined to comment on whether he had spoken to new chancellor Philip Hammond on the subject.
He went on to say: “I don’t see pensions as existing. A pension is an assured income until you die.” By this definition, he said pensions were a thing of the past.
Currently, the tax treatment of pensions follows an “exempt, exempt, tax” model, whereby contributions and earnings are tax free, but withdrawals are taxed at the marginal rate. The Isa model is the reverse of this, known as “tax, exempt, exempt” (TEE).
Many had expected Mr Osborne to introduce a Pension Isa in what turned out to be his final budget as chancellor in March. However he opted for the Lifetime Isa, which combined aspects of a Pension Isa with a Help to Buy Isa.
Some interpreted the Lifetime Isa as Mr Osborne backing down. Mr Johnson, however, said it was the first step on a journey towards a total overhaul of the tax treatment of pensions. He added that it was he who had persuaded Mr Osborne of the merits of a TEE model.
Former pension minister Ros Altmann told FTAdviser Mr Johnson “seemed to have strong contacts with officials in the Treasury”, adding that officials “were a huge problem in all this”.
“I have studied all aspects of pensions since the 1970s and I’m afraid Michael Johnson has much less experience,” Baroness Altmann said.
“He has done some excellent work on pensions but on this point he is absolutely wrong. Turning pensions into ISAs will be a disaster and will actually destroy pensions.”
She said tax free withdrawals from age 60, funded by today’s taxpayers, would “saddle future taxpayers with a massive bill, or with lower growth as pensioners have much less money to spend in their later life”.
She added that she was concerned that the new pensions minister Richard Harrington, whose portfolio is within the Department for Work and Pensions rather than Treasury, was “not strong enough to stand up to the Treasury on this one”.
Baroness Altmann said she strongly favoured a TET model, whereby pension contributions come out of after-tax income, but receive a flat-rate bonus of around 33 per cent of the contribution. This would leave higher earners worse off, but lower earners better off.
Under this model, investment earnings would be tax free, and drawdown would be taxed at the marginal rate.
Baroness Altmann said she had been arguing for this model for years, and had urged former prime minister Tony Blair to adopt it. “Blair did like the idea, but [former treasurer and prime minister Gordon] Brown didn’t so it never happened then,” she said.
She said that, when she proposed the TET model to Mr Osborne and other Treasury ministers, they “were interested”. But she said “some of the officials seemed to prefer this supposedly more ‘radical’ Isa option”.
When asked about Mr Johnson’s alleged influence with Treasury, a Treasury spokesperson said:
“As is usual with public consultations, as part of the pensions tax relief consultation process the Treasury engaged with a number of stakeholders.”
On the future of the Pension Isa, the spokesperson said government had concluded that now was “not the right time to undertake fundamental reforms to the pension tax system, with the roll out of automatic enrolment ongoing”.
james.fernyhough@ft.com
