George Osborne: Don’t just do something, stand there!

It is one month until the Chancellor announces the outcome of the pension tax relief review in his annual budget statement and I await with some trepidation.

Whilst the clever money appears to be on a headline grabbing shift to a flat rate tax relief system, I seem to be one of a very small but growing number of people urging the Chancellor to do nothing. “Don’t just do something; stand there!” is advice that experienced doctors gleefully pass onto their more junior counterparts. This is a reminder that we should stop and think before we act, that there are many instances in which doing nothing is the best course of action.

There has been a huge amount of debate over what might or might not happen and the uncertainty is not helpful for anyone. There was never a huge amount of support for an ISA style pension system and the early support for a flat rate of pension tax relief was built largely on the premise that it was the lesser of two evils.

Look back and it feels like the Chancellor got carried away with the success of the pension freedoms legislation and the hype surrounding the second hand annuity market. Overhauling the pensions tax relief system is not something to do lightly and may just become a legacy that comes back to haunt George Osborne.

At the heart of this is a huge question mark over what the Chancellor’s real intention is. The consultation is called ‘Strengthening the incentive to save: a consultation on pensions tax relief’ but it is hard not to be persuaded by the argument that the real driver is the burgeoning cost of pensions tax relief.

Whatever else he says next month, George Osborne needs to be honest with the UK public about what is really driving his decision making.

I fear that the need to control or even reduce the cost of pensions tax relief, especially with auto-enrolment bringing more people into the pension net, is more of a priority than the Government is admitting.

There has been widespread industry support for a flat rate of pensions tax relief. That support, misguided in my opinion, was based on an assumption that it will be at a rate which is broadly cost neutral to the exchequer, say around 30%. That doesn’t help reduce the cost of pension tax relief and it is starting to look like a very big assumption. The current perceived wisdom is that a flat rate would be set at a lower level of 25%.

This will not encourage basic rate taxpayers to save more via pensions and is likely to disenfranchise higher and additional rate tax payers. Awareness and understanding of pension tax relief is still relatively low so changing the level is highly unlikely to encourage basic rate tax payers to save more. If 20% relief does not encourage people, it is hard to see a flood of contributions for 25% relief.

I also maintain that the headline simplicity of a flat rate of pensions tax relief belies the underlying complexity when you start to consider the implications for employer pension contributions, particularly into defined benefit schemes.

Support has been diminishing for a move to an ISA style pension system where up front tax relief is removed in exchange for pension income being tax free - a taxed, exempt, exempt system (TEE). This has been widely dismissed but we should not underestimate the cunning of this Government. If the desire to reduce the cost of pensions tax relief drives the decision, this is the most attractive option for the Chancellor. Not only would the Exchequer save billions in tax relief but this could open up an eye watering tax raising opportunity.

Critics, of which I am one, of a TEE system have focused on the fact that it would lead to a two tier pension system while current pension savings that were made on an EET basis work their way through the system.

If the Government were to make a radical move to an ISA style pensions system, then somewhat controversially they could offer people a voluntary move to the new system by paying a one off tax on the pension savings they have already accumulated. If they set that tax at an attractive rate, many people could select that option.

Not everyone would choose that option of course so we’d still end up with a two tier system, and not for the first time.

It is no exaggeration that a strategy such as this could eliminate the budget deficit in a single stroke! Unlikely, but this Chancellor has a penchant for pulling rabbits out of his budgetary hat.

Whichever way the Chancellor jumps, more change will only further erode the public’s confidence in pension savings. Alienating the core Tory voter from pension savings could define George Osborne’s place in the history books. He wouldn’t be the first to suffer this fate.

If the Chancellor won’t take the medical advice on offer, maybe he will listen to actor Leslie Nielson who said, “Doing nothing is very hard to do, as you never know when you are finished.” Actually, if he doesn’t do nothing, he could be finished.

CEO

Andy co-founded AJ Bell in 1995, having spent a number of years working within the financial services sector. Graduating from Nottingham University in 1987 with a first class degree in Mathematics, he qualified as a Fellow of the Institute of Actuaries in 1993 and has built AJ Bell into one of the UK’s largest investment platforms.

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