Time to bite the bullet

Yet the biggest change this year to the pensions landscape has yet to be announced. It is likely to come in March when the chancellor delivers his Budget and finally discloses the outcome of a review into pension tax relief launched last July. A review bizarrely labelled ‘strengthening the incentive to save’ when we all know the real objective is to cut the cost of the tax relief bill (running at a cool £50bn gross a year).

Although any overhaul will not be implemented straight away, it is extremely unlikely that the current tax relief regime – which we all know favours higher rate and additional rate taxpayers – will remain in place. As crooner Sam Cooke sang back in the early 1960s, ‘a change is gonna come’.

This is despite concerns by some influential pension organisations – such as the pensions and lifetime savings association – that any move to scrap the current tax relief system could plunge the country into a retirement crisis. I thought we were already in one.

A host of options are on the Treasury’s cutting room table. Everything from the taxation of pensions being put on the same footing as Isas (contributions taxed on the way in but all withdrawals tax-free) through to the introduction of a flat rate of relief (30 per cent seems to be everyone’s favourite).

A host of options are on the Treasury’s cutting room table

Indeed, some commentators are demanding an overhaul of Isas at the same time. Rachel Reeves, former shadow work and pensions secretary, recently wrote in a national newspaper that people saving into pensions should get 25p or 30p from the public purse for every £1 that they put in.

But a lifetime allowance of £500,000 should also be imposed on Isa investments with the annual limit frozen at £15,000 (as you know, it currently stands at £15,240) for the remainder of this parliament.

In revealing her battleplan, the Labour MP and member of the influential Treasury select committee added: “The government needs a long-term plan for savings to secure our economic and financial resilience and must reallocate tax relief to those who we want and need to encourage to save.”

I do not think anyone with an interest in pensions would disagree with the thrust of her argument, especially the need for a long-term savings strategy rather than the current ad hoc approach. Pensions have sadly become a political football and it is time to draw this game to an end.

Of course, no one yet knows how the Treasury will be true to its word and deliver change that strengthens the incentive to save.