Stop chipping away at our pensions, Mr Osborne
I was brought up to believe that a works pension was a form of deferred pay. You sacrificed take-home pay today in return for an assured income when you finally retired. Fair deal.
Sadly, that belief has been smashed to smithereens over the years.
First, by employers cutting their pension costs through the taking of long contribution holidays, leading to the beginning of the end for pensions guaranteeing a retirement income linked to final salary.
Second, through repeated government interference, beginning with Gordon Brown’s inexplicable decision in 1997 to hit company pensions with a £5 billion a year tax charge – a move that undermined many pension schemes and, in some instances, led to employers being unable to pay out the pensions they had promised their workers.
You would have thought that governments (of all persuasions) had learnt their pension lessons by now. But far from it. They seem to believe that our pensions are theirs to interfere with at will.They are not – but meddle away they do. An outrage.
George Osborne, Chancellor of the Exchequer for nigh on six years, has shown utter contempt for pension savers by quietly chipping away at the tax-breaks available to those who want to look after themselves in retirement (rather than be a burden on the state).
When Osborne stepped into Number 11 Downing Street in May 2010, the maximum amount that could be saved within a pension without further tax charges (of up to 55%) being applied was £1.8 million.
Since then, this so called ‘lifetime allowance’ has been trimmed back, first to £1.5 million and now to £1.25 million. From 6 April this year, it falls again to £1 million. Although Osborne has said the allowance will then increase from 2018 by the rise in the Consumer Price Index, never believe what a politician promises today for tomorrow.
Although the government has indicated that only 55,000 people will be initially hit by the forthcoming reduction in the lifetime allowance, that doesn’t tell the whole story. Hundreds of thousands of savers will be forced to pay tax on their pensions over the long term.
Not just wealthy people, but middle-class professionals and those who have chosen to save diligently for retirement – yes, those sacrificing income today for a better retirement income in the future.
According to the number crunchers at investment adviser Tilney Bestinvest, a 45-year-old with a pension pot now worth £220,000 would eventually be caught by the £1 million lifetime allowance cap if £1,000 were paid into their pension every month (including their employer’s contribution and tax relief) and if the fund enjoyed annual investment growth of 5% between now and 2036.
Come spring time, Osborne Osborne will also curtail the amount that additional-rate taxpayers (those paying 45% scorns tax) can put into their pensions each year. For some, it will mean the maximum amount they caninvest in a pension being reduced from £40,000 pension to £10,000.
By then, probably in the Budget scheduled savers for 16 March, he will also have announced an overhaul of the tax relief available on pension contributions, which could result in the end of higher-rate relief (40%).
This follows a review launched by Osborne last summer, misleadingly entitled ‘Strengthening the incentive to save’. Indeed, tax relief could go altogether, with pensions then put on an equal footing with individual savings accounts (Isas) – contributions funded out of net pay but withdrawals made tax-free.
Whatever Osborne opts for, the fact remains that a massive contradiction lies at the heart of this government when it comes to pension saving. On the one hand, it tells us that we must increasingly look after ourselves financially and not rely upon the state to feather our bed in retirement. On the other, it increasingly takes away the tools with which we can build satisfactory retirement wealth.
Mr Osborne, by all means continue to manage the country’s finances effectively. But leave us to manage our retirement affairs. Stop meddling with our pensions.
Read why Jeff Prestridge thinks 2016 is going to be a positive year for savvy savers and his views on why equity release plans are a sensible option for cash-poor property owners.
You can read all of Jeff’s previous columns here.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.