Tax relief for the young is a step too far

Matthew Rankine

Matthew Rankine

The strange sound currently emanating from Number 11 Downing Street is either (a) the pre-Budget barricades being assembled or (b) an outbreak of backpatting among the Chancellor’s spin doctors

Assuming it’s the latter, any PR smugness is unlikely to be the result of a bruising week that saw two Cabinet ministers fall on their swords.

Instead it’s more likely to stem from the Treasury’s reported plan to increase the pension tax relief offered to young savers.

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You don’t need to be Malcolm Tucker to see how it might be spun – “a helping hand for young savers” and so on.

But such a policy would be worthy of one of the famously foul-mouthed spin doctor’s most expletive-filled rants.

The simple truth is younger people already have a big advantage when it comes to pension saving. It’s a seemingly magical phenomenon called compound interest.

Yet that fact has failed spectacularly to encourage most young people to get into the pension habit.

There’s an obvious and inescapable reason for this – 20-somethings are often too busy struggling to pay off student debt or scrape together a deposit for a home to start pension saving.

If they don’t have the spare cash in the first place, offering them extra tax relief will do little to nudge them into saving for retirement. Conversely, those who have left it late to start a pension need all the help they can get.

So if the extra relief offered to 20-somethings is funded by a cut to the relief offered to older savers, such a policy would move from being well meaning but pointless to downright cruel.

For now the talk of pension tax relief levels being dependent on a saver’s age remains just that – talk.

But Steve Webb, a man who knows better than most, revealed recently the Government “sees tax relief as a bloated area of public spending in need of reform,” and predicted the Chancellor will be unable to resist the temptation to reduce some pension tax breaks.

The only question then is where the axe will fall. Further reductions in the annual or lifetime allowances remain a strong possibility, while the introduction of a single rate of tax relief can’t be ruled out.
Unsurprisingly many in the pensions industry are violently opposed to such an idea – but their objections are most likely to stem from concerns that it would cause higher rate taxpayers to throttle back their contributions.

But to my mind the main problem with such a policy is that it decouples tax relief from the rate at which someone pays income tax. In the same way, introducing an age-related apartheid to pension tax relief would decouple it from common sense, equality and people’s ability to save.