Pensions tax relief “ripe for cutting” warns Steve Webb
Pensions tax relief, – notably the Lifetime and Annual allowances – are likely targets as Government struggles with lack of political majority and to find sources of revenue, says ex Pensions Minister
Sir Steve Webb, Royal London’s director of Policy and External Communications, told the CISI conference that anyone hoping Brexit negotiations would keep the Government from making further changes to the pensions and tax environment were likely to be disappointed.
Parliament has only 120 days a year to legislate, which means it is going to be focused on change that is needed, rather than the policies ministers may want to put forward.
In addition, since the snap election, the Government has lost its majority and it faces an even worse ratio of friends to opponents in the House of Lords. “It means anything contentious they won’t get through,” Webb said.
Consequently, they will look to achieve what they can via other means. There are three main ways they can do this, he added.
2. Popularist policies – those they know the Labour opposition will not contest, for example reducing the pension charge cap even further.
2. Tax – the House of Lords does not vote on tax issues, and the DUP has agreed to support the Government on matters of Confidence and Supply (i.e. tax). Conservatives are unlikely to vote against their own party’s budget so changes to tax are likely, Webb suggested, especially as the Chancellor has already banked the additional revenue he was to get from the increase to self-employed NI contributions and probate fees, which he now needs to replace.
3. Changes via regulation – the FCA has the authority to change laws without going through Parliament.
So where might the axe fall?
Webb believes tax relief is “ripe for cutting”.
“You can always find another £0.5bn in tax relief,” he quipped. And pensions tax relief is likely to be high on the hit list, “Because the Treasury hates pensions and loves ISAs.”
The reason he suggested is that Treasury “invented [ISAs]” but more importantly, ISAs “give them the tax today”, rather than at some point over the next few decades. This is exemplified by comparing tax relief on pensions, which is on a downward trajectory and the amount that can be saved into an ISA, which has been rising considerably in recent years. The inference is that Treasury wants people to start investing in ISAs over pensions.
In addition, Webb said, ministers see pensions tax relief as a pool of money that can be tapped into.
In which case, he suggested, first on the hit list is likely to be the annual allowance, which “could go down significantly”. The argument would be that not many people can put £40,000 into their pension every year so it makes sense to bring it down to a more realistic figure.
Second on the list is the upper rate tax threshold, which will be brought down from £150,000, with knock-on changes to taper relief as well.
And third, is the Lifetime Allowance. This is popularist also, as most people still see £1m as a large amount of money, he said, so cutting the allowance under that figure would save the Government money, be popular with the public and is unlikely to be opposed by the opposition parties.
Also on the cards is an increase to employer’s National Insurance rates.
However, he ruled out government trying to reduce the amount of ‘tax free cash’ people can take from their pension, saying that it would be very difficult to implement retrospectively. “You can’t tell people who have been relying on their lump sum to pay off their mortgage as part of their retirement planning that you are now going to take 40% of it,’ he said.
Given the position they are in, Webb concluded, “the Government will want to gain as much money with as little fuss as possible.”