Sometimes it’s easier to achieve a revolution if you don’t tell anyone about it. Perhaps they won’t notice. It’s harder when you’ve announced you want a revolution and then have to back down in a rather public way. But I wonder if George Osborne might be about to pull off just such a trick.
Recall the big announcement that wasn’t in the March budget? We were supposed to get radical reform of the tax treatment of pension saving. Last July, in the first flush of post-election euphoria, a Treasury consultation opened up the possibility that the whole system, whereby pension contributions are tax-relieved and tax is paid only once the pension is in payment, could be abandoned. Yet two weeks before the budget, under pressure from the media and the pensions industry, it was reform that was publicly abandoned.
Publicly abandoned, yes. But if there is one area of the tax system where Mr Osborne has been a genuinely radical reforming chancellor, it has been in the taxation of savings and pensions. As well as getting rid of the requirement to annuitise pension savings — so-called pension freedom — he has taken most people’s interest income out of income tax altogether, radically reformed the taxation of dividends and extended Isas. Given his overall direction of travel, I think we might be better off looking at his failure to implement major change in the budget as more of a tactical withdrawal than a full-scale retreat.
The most radical change put on, and then apparently taken off, the table was to move to a system under which pensions would be taxed like Isas. Contributions would be made out of taxed income, perhaps with some additional incentive, but no tax would be paid on withdrawal. In the new world of pension freedom, this could have simplified post-retirement choices. It also could have raised an awful lot of money up front. On the other hand, it probably would have cost higher-rate taxpayers quite a lot. It would have made life harder for the pensions industry. And we would have been asked to place a lot of trust in future chancellors not to tax withdrawals.
With euphoria well and truly evaporated in the heat of the Brexit battlefield, it is probably no surprise that Mr Osborne decided not to pick this particular fight. Nevertheless, he has quietly continued the revolution that has been unfolding over the past few years, a revolution that may fundamentally change the way in which we save for our retirement.
In March he increased the annual limit on Isa contributions to £20,000, double the level in 2010, and introduced the new Lifetime Isa (Lisa), which will allow anyone lucky enough to be below the age of 40 to attract a 25 per cent government match on contributions into an Isa up to £4,000 in a year. Money in a Lisa can only be taken out without a penalty to help to buy a first property, or after the age of 60. What does a savings vehicle that penalises you for accessing money before you’re 60 sound like to you?
The amount that the highest earners can contribute to a pension has been cut sharply this month to only £10,000 a year for those earning over £210,000. For most of us, the annual limit has already been reduced from more than a quarter of a million pounds to £40,000, while the lifetime limit on the size of a pension pot has been cut to £1 million, enough to buy an inflation-protected pension of a little more than £30,000 a year.
A decade ago you could put 30 times as much into a pension as into an Isa in any year. Most now can put only twice as much into a pension as into an Isa. For the richest, the situation is reversed: the pension allowance is half the Isa allowance. And while the lifetime pension allowance troubled very few a decade ago, it is catching an increasing fraction of highish earners.
The playing field is tilting radically and the new Lisa is tilting it further. Until now, the tax treatment of pensions has been clearly more attractive than that of Isas, or of any other standard investment vehicle. But for basic-rate taxpayers making their own contributions, the Lisa is clearly more tax-privileged than a pension (it remains the case that employer pension contributions are a better deal). That’s the first time in a very long time that a simple financial instrument open to all under the age of 40 has been more tax-privileged than a pension.
Pensions and owner-occupied housing account for about 80 per cent of household wealth, in large part a reflection of their tax-privileged status. The proportion held in pensions will surely now diminish. Limits to contributions mean that the highest earners are already contributing less than in the past, while the Treasury is receiving a handy few billion in extra income tax revenue up front. Further limits will hasten that process, while the liberalisation of Isa limits, along with the introduction of the Lisa, will increase savings through those vehicles. This looks like a large part of the revolution that last July’s consultation contemplated.
The problem with this quiet revolution, though, is that we don’t know what will happen next. I can piece together a narrative from what has happened bit by bit over the past six years. I can speculate that Mr Osborne might want to push this further. But I don’t know. He could just as well reverse policy.
This is not good enough. How on earth are we supposed to plan for our retirement when the goalposts are moved every year? If we are part-way through a revolution, we deserve to be told.
This piece was first published as a column in The Times newspaper and is reproduced here with permission.