James Coney  

Ignore the noise and concentrate on what is available

James Coney

James Coney

So, here is what happens.

Every now and again a story comes from the corridors in Whitehall that the government needs to raise some money. 

In the current climate, this happens a lot.

"How is the government possibly going to pay for this?" some enterprising journalist will start asking. "What taxes can the Treasury possibly raise or cut in order to fund all this spending?"

Eyes inevitably rest on the hulking great figure of tax relief on pensions. It is the second biggest relief in government (only main residence relief on capital gains tops it).

And so this enterprising journalist starts asking some more questions: what could be done to get this money back through pensions? 

This argument is so well rehearsed by now – you could chop the lifetime allowance still further, or bring in flat-rate relief, or axe employers’ relief on national insurance.

So this enterprising hack has a story, and the tale makes a front page splash, and then everyone else spends the next two weeks writing stories about tax relief.

But nothing ever seems to happen. 

There is a reason for this, and that is because if anyone ever stopped to think about it, making substantial reforms to tax relief on pensions is never going to happen.

The first problem is the unions and the the public sector. Of the roughly £40bn doled out on pension tax relief, about one-third goes to the public sector. 

If the relief is cut then that leaves an awfully big hole for departmental budgets to fill. I cannot see unions standing for that, but I can also envisage outrage in the private sector from workers who have seen their own pension cut and are being asked to foot the bill to top up public sector schemes.

Then there is the British Medical Association, which would surely be in uproar over any future cuts to the lifetime allowance given that GPs and consultants are already being hit by changes to annual and lifetime allowances.

Employers too would be absolutely walloped, as they are by far the largest beneficiary from tax relief on pensions.

I could go on, but the final issue is that implementing flat rate relief is practically impossible, as neither HM Revenue & Customs or employers have the systems for it. (Let alone the fact that any flat-rate system would be revenue raising for the Treasury, so anyone who thinks lower earners would get a 30 per cent rate are leaving in dream land).

The point is, though, that this makes it impossible for anyone to do financial planning. What you have to do is ignore the noise and concentrate on what reliefs are available at this moment.

It would probably be worth reminding this to clients. Because once all the noise dies down they will be confident they have made the right decisions.