Rarely can a single Budget have combined one set of measures on pensions which are deeply damaging with another which could greatly improve pension saving.
The problem is that the damaging measures are definitely happening, whilst the beneficial reforms are little more than a glimmer in the chancellor’s eye. The challenge is to make sure that we do not miss this opportunity to turn a sow’s ear into a silk purse.
The short-term changes, which take effect from April 2016, are the restriction of the lifetime allowance to £1m and the tapering of the annual allowance for those with incomes between £150,000 and £210,000.
The problems with the lifetime allowance are well-known, and the reduction to £1m will simply make matters worse. There will need to be another complex tier of transitional arrangements, and the system will continue to be based on pension outcomes rather than pension inputs, thus penalising those who invest their money well.
But the far worse change is the tapering of the annual allowance.
Reducing the tax breaks of high earners sounds like a no-brainer. The Treasury’s own figures show that two-thirds of all pension tax relief goes to the small minority of the population who pay tax at the higher (40 per cent) or additional (45 per cent) rate, so surely this money could be better spent.
But the way that the government has chosen to go about it adds mind-numbing complexity to the system and – even more importantly – risks a profound disengagement between Britain’s senior managers and the pensions of their workers.
The complexity comes from the fact that your annual allowance for any given year will depend on your ‘adjusted income’ for that year – something you cannot know at the start of the year. Adjusted income includes your gross earnings and other taxable income, as well as the value of your employer’s pension contributions.
Many people will not know if they will be within the scope of the taper at the start of the year, notably the self-employed and those whose remuneration includes a significant bonus element. So how are they supposed to decide how much they can put into a pension? And the complexity for DC savers is as nothing for the new arrangements for people with DB pension rights.
But complexity may not be the worst feature of the new system. The real damage could come if top and middle managers decide to do minimal pension saving or even give up on pension saving altogether. The tapering of the annual allowance will make many more managers question whether pension saving is worth the complexity and uncertainty.
And if senior management have no personal engagement in the workplace pension scheme, how can we have any confidence that the quality of such schemes will not steadily decline?
Just at the point that automatic enrolment has got over 5m workers into pension savings for the first time, it is incredible that the government should bring in a measure which will lead those who take the key decisions about pensions to have little personal interest in the subject.