But there is light at the end of the tunnel.
It comes in a Treasury Green Paper entitled Strengthening the Incentive to Save: a Consultation on Pension Tax Relief. This consultation runs until the end of September and asks a series of questions about whether the current system of pension tax relief is working.
While the chancellor’s Budget speech referred to one particular reform, the document itself is much more open. It sets out eight questions about the effectiveness of the current tax relief regime and provides a set of four principles against which any reforms should be judged. Rather ironically, given the changes already announced for April 2016, one of them is “simplicity and transparency”.
The chancellor suggested in his speech that any reform would only be about the tax treatment of new pension savings, rather than for existing pensions. I suspect that this was a political call, designed to avoid the inevitable headlines (which happened anyway) about the threat to take away ‘middle class’ tax breaks. But if reform was only about new pensions then it would be decades before we would start to see any real impact.
One reform under consideration is a switch to Isa-style tax treatment. This would mean that pension contributions would be made out of post-tax income, but pensions would be tax-free. The problem is that the public are expected to believe politicians when they say: “We’re taking away your tax relief, but don’t worry because we won’t be taxing your pension in some decades’ time”.
This sounds like a tough sell. But the bigger question is why anyone would bother to tie his money up in a pension product without upfront tax relief when he can put his money into an Isa with the same tax treatment and instant access?
A clue came when the chancellor hinted that there could be a government ‘top-up’ to pension accounts as part of any reform. Such a top-up could be used very creatively to give the biggest rewards for saving to those who most need encouragement to save for a pension – low to middle earners and young people. It would also be a relatively simple approach compared with current systems of pension tax relief.
But the problem is that we have over 10 million people who are not saving enough for their retirement. Changes to tax relief for new savers, however welcome, will do nothing to tackle this fundamental and urgent problem.
