The consultation paper itself is wide open. It is short, sets the context, and although it does pass comment on possible solutions – such as the TEE regime – the comment is brief and non-binding. It does not run through the possible solutions.
It does not give any pros and cons of these options. It only mentions that change may be needed, and any reform should adhere to the four principles of simplicity, allowing people to take personal responsibility, building on automatic enrolment, and sustainability – so, interestingly, any reform does not have to be ‘fair’ as such.
It puts forward the hypothesis that the main reason people do not engage with pensions is they do not understand tax relief. I think this is mainly rubbish. Generally, people know they get tax relief, and they know it is a good deal.
It is just that pensions and finance do not excite them much. It is a bit like me knowing my car needs various parts of the engine to make it work. Just forgive me if I do not give a hoot how they all fit together, or want to open the bonnet and look. But this does emphasise two points for me. The first is why give good tax relief if people are essentially unaware and ‘ungrateful’ for this benefit? You want to give it to an appreciative audience instead. And the second is, it is easy to cut a benefit if its recipients are unaware of its value.
The Treasury is stressing that reform is not a foregone conclusion. It says retaining the status quo may indeed be the best option. Quite honestly, I do not believe that. I think the cost driver is too great, and, once you open the bottle, putting the change genie back in will prove to be too difficult.
The Treasury also says all options will be considered. There seems to be two main ones doing the rounds. First a move from an EET basis to a TEE one. There are, of course, problems with this, including the practical ones of having to segregate ‘before’ and ‘after’ pensions, and the costs for employers. The biggest problem though is one of trust.
First of all, do people trust future governments to keep the exempt promise on the way out and not change at a later date? If we remove the tax relief carrot, the government may choose to replace it with an incentive to encourage long-term saving, such as a cash payment into the pension plan. But if it does, what are the chances that incentive will be whittled down in the future?
