Scrapping the triple lock and introducing national insurance for pensioners could be on the to-do-list when the government assesses the role pensions can have in paying off Covid debt.
Advisers and industry spokespeople have predicted pensions will not remain unscathed when it comes to future tax hikes, with some claiming the older generation has benefitted for some time now and it is their turn to pay up.
Tom Selby, senior analyst at AJ Bell, said one way to do this would be by applying NI on retirement incomes, which are currently exempt.
Mr Selby said: “This would clearly bring in some much-needed cash, although there will be a difficult trade-off between boosting the coffers of the exchequer and risking taxing off the UK’s economic recovery if people reduce spending.
“It would also risk alienating older voters, who remain arguably the key demographic when it comes to winning power at the ballot box.”
Furthermore, he said it could have political implications, leaving the Conservatives fending off accusations they had broken their manifesto commitment not to raise income tax or NI.
But Mr Selby added: “There is an argument to say that, with older people more likely to rely on both the NHS and the long-term care system, at some point their NI exemption will at the very least need to be reviewed.”
Alan Chan, director and chartered financial planner at IFS Wealth & Pensions, also suggested NI should be levied on pensioners, especially as it pays for particular benefits enjoyed by the older generation, such as the state pension.
Mr Chan said: “It would be unfair if the younger generations were to pay higher tax rates while the triple lock guarantee remains unchanged, because the state pension is unfunded and it is wholly dependent on the younger generations to pay for it.
“Everyone will need to pay their fair share, one way or another, in order for the UK economy to return quicker and stronger.
“One fair way to raise extra revenue from pensions would be to scrap the triple lock guarantee on state pension and just have
Retail Price Index or Consumer Price Index protection instead, which is in line with many defined benefit pension schemes.
“The government could also reduce higher rate and additional rate tax relief on pension contributions, marginally increase NI rates for all workers, and introduce a new, lower rate of NI contributions for pensioners.”
Triple lock must go
Under current rules, the state pension is increased by the triple lock, which is the highest of earnings growth, price inflation or 2.5 per cent a year.
In its manifesto, the Conservative Party vowed to stick to the pension triple lock promise but the government has since been advised to use this option to pay off some of its coronavirus debts.
There are also concerns an expected jump in wages could see the state pension become unaffordable, especially when the government is dealing with mounting debt.
John Waldie, managing director at Atkins Ferrie Wealth Management, said: “The country simply can’t afford the triple lock any more than we could afford a triple lock on the benefits system.
“The triple lock was always unsustainable over the longer term as it was a runaway train, and now we have reached the point where the brakes need to be applied.”
The threat of a tax raid on pensions has been on the cards for a while now and only earlier this year (February 10) former chancellor Sajid Javd was looking to make the system fairer for those on lower incomes, by cutting high earner’s relief to 20 per cent.
There could also be a revival of the debate around the introduction of a 30 per cent flat rate of tax relief or turning the system on its head so relief is given at the point of withdrawal.
But last week rumours started to swirl again after Paul Johnson, director at the IFS, told a Treasury Select Committee hearing that pensioners were a feasible target as they had been protected from past tax rises and have received generous benefits from their pensions.
He suggested the amount of tax paid on pension withdrawals could be increased marginally to bring in extra revenue, particularly on occupational pensions.
But Simon Harrington, senior policy adviser at Pimfa, was completely against this proposal, arguing that pensions should be left alone in most cases.
He argued: “Ultimately pensions should be considered as deferred income and, as a result, should be taxed as such. There is clearly scope to reconfigure the way in which pension tax relief in particular is calculated and we would support such measures, however we don’t think it’s appropriate to treat the taxation of pensions at the point of withdrawal as being distinctly different to income.
He added: “We would support a review of pensions tax relief given that the current system clearly benefits higher earners over lower earners.
“Ultimately it’s for the government, through consultation with industry, to consider what is fair and what protects the value of pension saving as a long-term investment for everyone.”
Meanwhile Steven Cameron, pensions director at Aegon, urged the government to ensure any changes to pensions are fair across all generations.
He said: “Covid-19 has affected different generations in different ways and paying the price must be shared fairly.
“Pensioners and workers are both subject to the same rates of income tax, although as pensioner incomes tend to be below earnings at working age, those below state pension age do pay a much higher proportion of income tax and more will be higher and additional rate taxpayers.
“Any increase in the rates of income tax would automatically apply to pensioners as well as workers. But NI is not paid by pensioners, so younger generations might not see it as fair if their NI had to increase to pay for a big uplift in state pensions.”
He also warned changes should not be made retrospectively, to avoid disincentivising people from saving.
Mr Cameron added: “Individuals are locking money away for decades and shifting the goalposts when they come to take the proceeds could severely damage confidence in such long-term savings.”
amy.austin@ft.com
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