As the government considers its options for raising money in the Budget, when it comes to pensions, it must think through the wider impacts.
Think tanks have floated a raft of policy ideas, but it is essential to look beyond the figures and understand the range of practical implications, from the operational to the psychological.
For example, the 25 per cent tax-free lump sum may be under threat, with £100,000 suggested as a new lower limit. Yet many people have planned their retirement based on taking this lump sum and could even challenge this in court.
To prevent that, the Treasury tends to put protections in place for those lucky enough to have already built up a pot big enough to take more than the new limit.
But doing so adds complexity to the whole system.
Plus, the idea of taking 25 per cent tax-free is one aspect of pensions that savers really understand and value, so even if a change only impacts the wealthiest, a much bigger group of savers will notice.
Another mooted option is to change how pensions are inherited. Pensions can currently be passed on tax-free if the pensioner dies before age 75, and at the beneficiary’s marginal rate for deaths after 75, and inheritance tax is not charged.
There are very distinct ways of changing this: a special tax charge specific to pensions, or bringing pensions into scope of inheritance tax.
In practice, this will mainly change how wealthier people plan their retirement. Any change should certainly avoid holding up payments to bereaved families.
Then there is the idea of imposing national insurance on employer pension contributions. The results of a survey we conducted with REBA showed that nearly half of employers that pay staff more than the minimum pension will consider reducing their contributions if the chancellor introduces national insurance taxation on employer pension payments.
This would mean lower retirement standards in the future at a time when we are already not saving enough for the long term.
For any change the chancellor must decide whether anti-forestalling measures are needed, and whether these could also have unintended consequences.
Some measures cause a rush to act before April 6, creating a time pressure that does not lend itself to good consumer decision-making. But measures with immediate effect have operational and consumer impacts too.
The recent abolition of the lifetime allowance and the confusion and disruption caused by its implementation is a warning of how not to go about it. Decision-making was based on the headline, rather than the actual impact.
When announcing the abolition, the then-chancellor did not mention that it would be replaced by three new allowances.
What could have been a simplifying measure ended up adding dizzying complexity, with insufficient lead-in time for government to deliver it. Most importantly, not enough attention was paid to pension savers caught in the transitional arrangements.
