Weighing up the real costs of pension tax relief

I stand by that opinion because of the weakness of the government. But surely the day is fast approaching when pension tax relief must be reformed. 

In its present form it looks increasingly inequitable and indefensible. Pension tax relief now costs £50bn a year and two-thirds of that is going to people earning more than £45,000 per year.

That is £33bn of tax relief going to higher rate taxpayers. It is Robin Hood in reverse and a regressive tax relief of the most aggressive type.

Pension tax relief now costs £50bn a year and two-thirds of that is going to people earning more than £45,000 per year

With auto-enrolment, the cost of tax relief can only rise unless somebody takes the bull by the horns.

Yet chancellor Philip Hammond, who attempted a National Insurance raid on the self-employed, appears too timid to reform pension tax relief.

Former pensions minister Ros Altmann has long argued for a flat rate of tax relief. I have always felt it is difficult to argue against such a system.

If this had been tackled years ago we might have seen a retention of the existing total relief based on a unitary rate of perhaps 25 per cent. But as the cost rises it will become increasingly tempting to simply scrap higher rate relief.

One of the barriers to reform has been headlines generated in national newspapers (including the one for which I also write). 

Highly paid editorial staff – and the accountants who brief journalists – are particularly fond of pension tax relief; often it seems to be the only aspect of personal finance they understand.

But the editors of those papers must be made to understand that, precious though this perk is, it is becoming unaffordable.

With a single rate of tax relief it might even be possible to relax other barriers to long-term saving such as the lifetime and annual allowances. 

Change might be regarded as too controversial right now, but the real question should not be whether the government can afford the controversy. It should be whether the nation can afford the tax relief.

Housing market inequality

If you want to know what is wrong with the so-called housing market you only need to consider one figure – the ratio of mean annual earnings to median house prices.

When I started writing on housing in the 1980s, first-time buyer house prices were typically less than three times earnings. This situation persisted until the end of the 1990s, according to Nationwide figures.

Now Nationwide puts the ratio for first-time buyers at 5.4 while the Office for National Statistics says the average home is 7.6 times average salary.

Halifax says prices rose 1.4 per cent during the past quarter, so there remains little sign of the oft-predicted slowdown. 

Low mortgage rates have helped to disguise the plain truth that this “market” does not function. Surely the tipping point was when we stopped seeing housing as a chance to own our own homes and started seeing it as an opportunity to own someone else’s?

Between 1999 and 2015, more than 1.7m Buy-to-Let mortgages were given according to Council for Mortgage Lenders figures. This doubled the size of the private rented sector.

In itself, this was no bad thing, but the consequence was that first-time buyers were competing with investors. The irony is that those investors are often the parents of youngsters who could no longer themselves afford to buy. 

The tax imbalance favouring investors has been addressed, but home ownership remains out of reach for many. Meanwhile, evidence grows that schemes to encourage home ownership such as Help-to-Buy are being exploited by wealthier buyers with 40 per cent of recipients earning more than £50,000 a year.

It has taken the better part of a generation to create this havoc with woeful levels of house-building, restrictive planning regimes, tax subsidies and ill-thought-out incentive schemes. It will take more than the couple of billion pounds coughed up at the Conservative Party conference to fix it.

Saving by switching

It has been pointed out to me that sticking with one platform rather than using two or three provides ease of administration.

I cannot argue with that. But at what cost?

A quarter of people have more than one bank account, according to 2015 research by the Social Market Foundation think tank. Many have multiple savings accounts and credit cards. Switched-on savers have rarely baulked at moving their money to chase a few pounds extra interest. 

I suspect the main barrier to people using multiple platforms is that they have no clue how much they could save by switching.

Tony Hazell writes for the Daily Mail’s Money Mail section