Pension tax relief could be cut for older workers to fund tax cuts for the young in the next budget, as the government pledges to win-back the younger generation after the last election.
According to reports, which have not been confirmed by the Treasury, the plan would be to cut national insurance contributions for workers in their 20s and 30s, which would be funded by reducing tax relief for people approaching retirement.
However, several pension experts have told FTAdviser that such a measure would be very complicated to implement, adding complexity to the system, and would not have a great impact when spread among all the younger workers.
Jamie Jenkins, head of pension strategy at Standard Life, said what he branded a ‘tax on age’ plan is one of number of options available, but he was not supportive of the idea.
He said: “While it may seem like a fair way of doing things, it runs the risk of being over complicated to administer, and therefore adding cost and complexity into the system.”
Tom Selby, senior analyst at AJ Bell, said that such idea “would be a nightmare to implement both practically and politically”.
He said: “The Treasury would need to balance simplicity against fairness. Having different levels of tax relief based on age would risk layering extra complexity on an already complex system.
“There would also presumably have to be some form of means-testing involved to ensure super-rich younger workers aren’t given a bigger tax relief boost than older workers in less well paid jobs.
“We are also at a crucial stage of automatic enrolment and you would have to question whether now is the time to uproot pension savings incentives.”
On the opposite side is Sir Steve Webb, director of policy at Royal London, who believes that implementing such a policy is plausible.
He said: “We had different tax allowances for the over 65, different minimum wages for the under 25, it would be not impossible.”
However, it would have a small impact, he argued.
He said: “The sort of amounts of money you would get from cutting tax relief, in a way that would be politically acceptable, spread across millions and millions of younger workers, would result in a tiny amount per head basically.”
For Sir Steve, this is an attempt from the Conservative Party to win back the votes of the younger generation after the last election.
And if they go too far with the tax relief, then the government “would upset an awful lot of older people who are actually still more likely to vote”.
Mr Selby agreed. He said politically the Chancellor would be "treading on very thin ice".
"Older voters still hold the key to electoral success and raiding their pensions would risk alienating the very people who delivered [Prime Minister] Theresa May to Downing Street, albeit as the head of a minority government.”
Sir Steve argued that the government is ‘testing the waters’ ahead of the budget, set for 22 November.
He said: “Before a budget, what they do is put an idea out there, and if everybody says that it is a terrible idea then they say they never meant to do it.”
If the proposal goes ahead, savers should expect cuts to the tax relief in the annual allowances, or even in the lifetime allowance, which are already on the table, he added.
According to Nathan Long, senior pension analyst at Hargreaves Lansdown, such plan would only have merit if the “benefits are spread across the spectrum”.
He said: “Removing the lifetime limit on pension savings and the tapering of the annual limit for higher earners would be a must in any revamp.
“Rather than make the current situation worse for older people, the government could simply make it more generous for younger people in conjunction with an overall lowering of the annual contribution limit for everyone. “
The main benefit of this would be that people would receive a greater proportion of tax relief when they are younger to take advantage of the compounding of investment returns, he said.
maria.espadinha@ft.com
