#Budget2016 – Pension reform by carrot & stick

Here’a my very quick instant reaction to the #Budget2016 – has George Osborne pulled off a blinder on pension reform?

What’s he trying to do?  Cut the almost £50bn of tax relief on pensions, most of which goes to higher earners.

If at first you don’t succeed…

George’s groundwork has cut the caps and limits so the very high earners aren’t abusing the reliefs, as the Treasury sees it.

His recent efforts were apparently to try to replace conventional pension relief (tax relief at your highest tax rate on entry, and during the investment, but taxed long after he leaves office) with either flat rate pension relief (as above, but top up basic and higher rate taxpayers by the same amount), or the ISA approach (tax on entry, but not during investment nor on withdrawal).  The revolting pensions industry put paid to that.

But of course there’s another way to get what he wants – to just deter people from taking him up on pension relief.  How can he do that? With a carrot and stick.

The stick started a few years ago.  It’s called endlessly tweaking and tightening the rules.  This creates uncertainty and makes the planning implicit in siphoning off a large chunk of your regular income into a pension very difficult. Why lock your money away when the rules change every year – and various inducements/etc may appear in the future which you’ll miss out on.

The carrot started more recently.  Carrots are tempting treats designed to make you forgo the less appealing pension alternative.  Help to Buy was the start of this; then the Help to Buy ISA came last year.  But now the big fat carrot has just been pulled out – the Lifetime ISA.

Lifetime ISAs represents a rebranded pension – ‘free money’ topping up your savings, provided they stay saved.  But unlike pensions your withdrawals after the age of 60 will be tax free – or so the government would like you to believe. Special provision for using these savings to buy primary homes, which are the preferred Tory savings vehicles.

In addition, CGT has dropped; higher rate CGT from 28% to 20% (except for 2nd homes, which are definitely NOT the preferred Tory savings vehicle).  This provides another carrot in favour of non-tax-sheltered investments.

While we’re talking carrots, there’s also the £5k annual dividend allowance and £1k interest allowance which were announced last year.  Both of which sound like quite a lot when you are making your initial decision on how to save and whether to use a pension to save.

Why would a youngster start on the pension track given these inducements?  Especially when on current form if you keep cash close at hand an even better inducement will arrive in the future?

It looks like George will get his way after all, i.e. lower costs of pension tax relief, without actually withdrawing anything from anybody.