The recent direction of travel for pension savings has all been about increasing simplicity and flexibility. Removing the requirement to annuitise pension pots and freeing people to do what they choose with their pension savings has well-publicised risks but is philosophically right. It’s your money, you should be free to decide what to do with it.
However, “Manifesto Week”, which kicks off today, and the scramble for middle-class votes by all the parties, risks making saving and investing for retirement more complex than it has ever been.
Both major parties have now made it clear that they see wealthier pension savers as fair game. The details differ, but reports over the weekend suggest that limiting pension contribution tax relief is on the agenda for both Labour and the Conservatives.
Both parties have made clear that people earning more than £150,000 a year will soon lose the ability to put aside money for their pensions out of untaxed income.
Either by limiting the relief to the basic rate (Labour) or by limiting the amount that can be saved tax free (Conservative), pension saving may soon no longer be the obvious legitimate way to keep your money out of the hands of the taxman.
In the case of the Conservatives, the reduction in the pension tax-break is explicitly being used to fund an increase in the inheritance tax allowance for home-owners which many people will welcome.
Both proposals reduce the simplicity of pension saving. You will no longer simply save for a pension out of untaxed income.
In my view, these new proposals miss the main point about pension saving – which is that simplicity is an essential pre-condition for successful retirement provision. People are much more likely to save if the benefits of doing so are easy to understand – just look at the popularity of ISAs for proof of that.
The proposed changes are an unwelcome change in direction for savers and investors. Deciding to put money aside for your retirement will no longer be a simple decision. That is a problem for all of us and not just for a small number of high earners directly affected.
Under Labour anyone earning more than £150,000 would be restricted to income tax relief at the basic rate rather than the higher rate they currently enjoy. Under the Conservatives, the £40,000 annual contribution limit would be progressively reduced to £10,000 a year for anyone earning between £150,000 a year and £210,000.
A lack of simplicity is also evident in the proposed inheritance tax allowance hike because political considerations mean it has had to be tailored to ensure that it is not perceived to be just a perk for the wealthy. Again this will be achieved with a taper applying to the largest properties and by limiting the benefit to the bequeathing of family homes rather than more generally to all inheritance.
So pension saving is getting more complex, inheritance tax planning is more complex and all of that comes on top of increasing complexity in the ISA landscape, with the recent proposals to introduce Help to Buy ISAs aimed at first time home-owners and tax-free saving outside of the ISA wrapper.
An important aim of tax policy – other than the obvious extraction of maximum feathers for minimum hissing - should be to encourage people to do the right thing. Making adequate provision for our retirements is unarguably the right thing. It is a great shame that electoral considerations are getting in the way of encouraging people to do it.
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