I remember it well, because I read it sitting in a former nunnery in Fornalutx, Mallorca, while the sun threatened to turn me a beautiful pink.
Introduced by former chancellor George Osborne, the then chancellor, the consultation document’s purpose was simple: to establish whether the way people are incentivised to save into a pension remains fit for purpose. Is there a better way than the current system, which links the amount of tax relief an individual gets on their contributions to their income tax rate? A system that favours higher-rate over basic-rate taxpayers – the incentives for additional-rate taxpayers were dramatically curtailed through the introduction of the tapered annual allowance.
Transparency
As Mr Osborne said in the document’s foreword: “If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.” He added: “The government’s interest is in a lasting system that stands the test of time.”
The document went on to pose a number of key questions. Would a simpler system result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension? Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions? And would an alternative system allow individuals to plan better for how they use their savings in retirement?
It was not only me who devoured the document’s contents. About 450 individuals, financial institutions and think tanks responded with a multitude of thoughts on how pensions could be re-energised and revolutionised.
Although a shake-up of tax relief seemed likely, it never came. A backlash from a frightening alliance of Tory MPs, constituents and the Daily Mail caused Mr Osborne to take a step back – at a time when he was fearful of upsetting Middle England ahead of the June 2016 vote on Brexit.
So we remain where we were when Mr Osborne published his June 2015 consultation document. Apart from introducing the tapered annual allowance for high earners, the incentive to save into a pension is still greatest for high earners.
This was very much confirmed in a recent report on pensions issued by the Royal Society of Arts (do not be deceived by the name, it has a long history of issuing thought-provoking research on pensions). Entitled Venturing to Retire, the report focuses on ways to boost the long-term savings and retirement security of the self-employed, currently excluded from auto-enrolment.
But it says any reform in this area cannot be done without a radical overhaul of the pension tax relief system. It describes the current arrangements as ‘regressive’, pointing out that while basic rate taxpayers account for 51 per cent of current pension contributions, they only receive 32 per cent of pension tax relief. In contrast, higher-rate taxpayers make 41 per cent of contributions but get 53 per cent of the relief.
It argues for the replacement of the existing ‘multi-tiered’ tax relief system with a single flat-rate set at 30 per cent. If this were introduced, the society argues, 75 per cent of pension savers would be better off, pension pots be boosted and the incentive to save would be encouraged.
It admits any that journey from multi-tier to single-tier would not be easy, but says it would be cost-neutral for the government. If the cost of tax relief rose as a result of higher savings rates, the society says the government could reduce the annual pension allowance, currently at £40,000.
Pension tax relief
The introduction of a flat rate of pension tax relief was a recurring theme in responses to Mr Osborne’s June 2015 document. Indeed, it is a path Mr Osborne was keen to go down, until the ‘frightening alliance’ built up its head of steam.
In October last year, ahead of the Autumn Budget, I somewhat bravely (given the Daily Mail’s stance) called for chancellor Philip Hammond to go down this route in the pages of the Mail on Sunday.
I wrote: “If any overhauling of pensions is to be done, it should surely be centred on making it less complicated. I would do away with the £1m lifetime allowance [now £1,030,000]. I would introduce a flat rate of relief (30 per cent) available to all. This in turn would allow the tapered annual allowance to be removed – a pernicious and bewildering restriction.”
I concluded: “All savers could then have the same annual allowance – preferably £40,000. That is what I call pension fairness.”
It got a mixed response from readers, with some saying my ideas were good. Others accused me of being in league with the devil. Of course, Mr Hammond sat on the fence last November, and he is likely to do so as long as Brexit remains an issue and the government’s majority is wafer-thin.
But at some stage, an overhaul of pension tax relief must take place. Do you agree? Or am I really the devil’s representative on mother earth?
Jeff Prestridge is personal finance editor of the Mail on Sunday
