George Osborne’s apparent U-turn on plans which could have seen him raid pensions tax relief which supports retirement saving by millions of British people does, on the surface at least, seem rather surprising. For weeks, acres of newsprint have been devoted to suggestions that one of the ‘surprise’ announcements Osborne may make in the budget on 16 March could be a major overhaul of pensions tax relief. With over 12 million people not yet saving enough for their retirement, action is clearly needed.
The big test for this budget is whether it can start to secure the foundations for the economy of the future. This decision suggests that Osborne is more focussed on securing the future leadership of the Conservative party.
Some reports of reform had indicated a possible move to a flat-rate of tax relief for all pension schemes, ending the current direct link to the level of income tax that an individual pays. Many supporters of this scheme have highlighted its simplicity and the opportunity to incentivise greater saving by those on low and middle incomes, depending on the rate chosen.
Other reports suggested that the Osborne was planning to overthrow over 30 years’ direction of travel in promoting pension saving by replacing pensions with an ISA-style product that would end access to a tax-free lump sum and tax-relief on employers’ pension contributions.
The process Osborne has pursued has step-by-step demonstrated a clear departure from previous major overhauls to pension policy. On those occasions, painstaking consultation was conducted with political parties, employers, pension fund trustees, trade unions and pension providers to reach a consensus so that changes lasted for at least a generation. Osborne has turned his back on such an approach.
The cross party Pension Commission led by Adair Turner under the last Labour government led to the introduction of the auto-enrolment – the biggest single transformative policy change in the last 50 years, and was done on exactly that basis. At its heart was ensuring employer engagement in retirement saving by their employees.
Friday’s Treasury leak is nothing other than a U-turn on a series of possible plans, suggesting that strengthening the incentive to save was never his real priority. Osborne’s approach has fuelled suspicion that his real motivation, rather than being about what is in the best interest of the retirement income of millions of British workers, was a cynical attempt to raid people’s pension pots to pay for his own economic failures.
And Osborne has form on this, he raided pension savings to the tune of over £12bn in stealth taxes since he came to office.
The amount we spent on pension tax relief is not small – nearly £35bn in 2014-15. With the success of auto-enrolment, that bill is forecast to rise as more working people save for their retirement. It is entirely right to look at whether the current tax relief system is fair, but Labour will not support any proposals that jeopardise employer engagement in retirement saving, which support low and middle earners.
An ISA-style product which was the subject of the last leak would have seen a shift in taxation from the time when people are receiving their pension to when they are paying it in. Analysis suggests this approach could well result in less being saved in pensions than is currently the case. People would either have to pay more to get the same amount of return, or settle with investing less. And reports suggest there is a very real danger that many employers would walk away from providing the level of contributions they currently make. This would pose a real threat to the level and sustainability of future retirement incomes.
Any sensible piece of public policy aimed at incentivising retirement income should have consensus, sustainability and fairness at its core. That is the approach Labour has taken when we have proposed major retirement saving policy changes.
Any proposals that Osborne may try to make to pension tax relief – whether in this budget or in a future one – will need to, first, provide clear evidence that they will lead to more people saving in retirement; and, second, that they will lead to them saving more. The chancellor must provide clear evidence on who the winners and losers from any proposal will be, commit to consulting employers, trade unions, pension scheme trustees and the pensions industry to secure broad buy-in for the measures and ensure his plans are not just another raid on the retirement savings of millions of working people.
Those aren’t just the benchmarks that Labour will be applying but those that millions of working people will too.
Seema Malhotra MP is shadow chief secretary to the Treasury