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JEFF PRESTRIDGE: Tax relief on pension contributions should not be tinkered with

By Jeff Prestridge for The Mail on Sunday

Published: 15:52 EST, 22 August 2015 | Updated: 15:52 EST, 22 August 2015

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The summer holiday season may be in full swing (shame about the weather) but it hasn’t stopped many of you from emailing me your thoughts about the future of pensions. Thank you, thank you.

This follows the Government’s decision in the wake of last month’s Budget to take a hard look at the tax incentives savers are currently given to put money aside for their retirement.

The offending document, entitled ‘Strengthening the incentive to save: a consultation on pensions tax relief’, is well worth a read and can be downloaded at www.gov.uk. Upon reading, a foaming mouth is guaranteed (mine did for 24 hours).

Holiday and pensions: A traditional house at Majorcan mountain village Fornalutx

Your initial views on the report made for interesting reading while I whiled away my own holiday nights in a majestic Majorcan mountain village – Fornalutx, check it out – sipping white Rioja through a straw, peeling some of the biggest prawns I have ever clamped my eyes on and with only my loyal and loving iPad for company. All against the stunning (some would say romantic) backdrop of the rugged Puig Major, Majorca’s highest peak.

Admittedly, they (your letters, not the prawns) were not quite as colourful as one of Anna Nicholas’s books on living in Majorca (Goats From A Small Island: Grabbing Mallorcan Life By The Horns is particularly good) but they were thought-provoking all the same. Thank you again.

I won’t quote verbatim from any of the correspondence (many spleens, I fear, were vented) but suffice to say the Government and those fortunate enough to belong to public sector pensions (civil servants and Ministers in particular) came in for some wholehearted criticism.

The gist of your thoughts is as follows.

One, tax relief on pension contributions should be left well alone – although, if needs must, a flat rate for all is better than its complete removal. A figure of 30 per cent seemed to be the most popular.

A complete removal of tax relief, you said, would do untold damage to the savings culture and negate the good work done by the Government in auto-enrolling workers into pensions.

This programme, launched nearly three years ago, has so far pushed more than five million employees into work pensions and by the time it is rolled out in its entirety in 2018, that figure will rise to more than nine million. Depriving them of tax relief on future contributions into plans they were very much pushed into would be cruel.

Two, pensions should not be turned into clones of Individual Savings Accounts – or Pisas as one reader neatly described them. In other words, pension contributions should continue to enjoy tax relief with tax only payable once people start accessing their funds. With a Pisa, contributions would be made from net pay but all withdrawals post age 55 would be tax free.

Three, it’s about time generous defined benefit public sector pension schemes were closed to further contributions with all public sector workers (teachers, doctors, civil servants) required to save instead into a riskier defined contribution scheme as most people now do in the private sector.

I am not quite sure what this has to do with tax incentives and pensions but I will air it because it’s obvious gold-plated public sector pensions grate with many readers. Come on George Osborne, tackle this pensions anomaly.

Four, if the Government wants to incentivise pension saving, it should stop reducing the lifetime allowance – the maximum value that a pension fund can grow to before swingeing taxes are applied to any excess. This reduces from £1.25million to £1million next April, making pension planning for many extremely tricky and in some instances not worthwhile.

Five, never trust a government when it comes to pensions. What one government promises, a future one will certainly renege on.

In light of such views, it is not surprising that the Government’s consultation continues to stir a hornet’s nest. And it is not just good honest, hard-working readers of The Mail on Sunday that are getting stirred.

Last week, the boss of one of the country’s most successful financial companies weighed into the debate – and he pulled no punches. Phil Loney, chief executive of Royal London, said the introduction of Pisas posed ‘considerable risk to the Government’s aim of creating a savings culture in the UK’.

Pointedly, he said the public would not believe that the promise of tax-free pension income some 25 to 30 years into the future – in exchange for the loss of tax relief on contributions today – would ever be honoured. As a result, people would stop saving into pensions, triggering a ‘significant’ fall in savings which are already too low.

On the ball Mr Loney. Tax relief on pension contributions should not be tinkered with. Now or ever.