Nobody will ever criticise former Chancellor of the Exchequer George Osborne for bringing forward too few new tax laws. The sheer weight of tax legislation enacted on his watch will ensure that. But in a report published on 11 October 2016 the respected Office of Budget Responsibility highlights inadequacies in the policy thinking which underpinned Mr Osborne’s changes to private pensions and savings. ‘Never mind the quality, feel the width’ to quote the old television sitcom.
The OBR observes that, while these changes seem set to provide a short-term gain for the UK economy until 2020-21, the effects of the long-term cost of the measures will be felt from 2021-22.
As a quick reminder, Mr Osborne’s key changes to private pensions and savings were:
- Restrictions to the pensions annual allowance and lifetime allowance – these lowered annual tax free pensions contributions to £40,000 and lifetime contributions to £1 million;
- Pensions flexibility – this allows people to access their pension funds ahead of retirement, from age 55;
- Secondary market for annuities – this allows pensioners to sell their current annuities on a secondary market;
- Savings allowance – this introduced a £1,000 allowance before tax is due on interest income (£500 for higher rate payers);
- Increase in ISA limits – this raised the maximum amount that can be saved in an individual savings account (ISA) to £20,000 per year; and
- Help to buy ISA, lifetime ISA and help to save – these are new savings products supported by government top-ups, though subject to certain conditions.
To put this in context, private pension wealth accounts for 40.5 per cent of household wealth in the UK. This is bigger even than property (net) at 35 per cent. So it is crucial that changes to the tax system for private pensions and savings are based on sound policy as they affect millions of people for most of their lives.
Regular readers of Tax Brief will know of our consistent concerns about the overall trend of these changes which:
- Reduce the attractiveness of adequate pension provision while stemming the rise in the cost of tax relief on pension contributions
- Raise taxes through charges on withdrawals, while simultaneously boosting the amount of money in circulation in the economy
- Increase the risk that the government will have to provide a safety net for more people whose post-retirement income is inadequate
- Offer more ISA-based alternatives where savings are made out of taxed income.
The OBR recognises each of these in its report.
With investment providers, industry experts and now the OBR all expressing concerns about the nature, speed and undesirable effects of many of these changes, what can be done?
Let’s start by listing some of the things which should not be done:
- More piecemeal changes and knee-jerk reactions
- Destabilising uncertainty over a protracted period
- Poor policy thinking limited to the life of a Parliament (the dates in the OBR report hardly seem coincidental)
Instead, we call on the new Chancellor to:
- Define an unambiguous, sound policy approach which is clear in what it is trying to achieve
- Introduce one (only one) set of changes to get the UK tax regime for pensions and savings back on track
- Change the “mood music” of his predecessor from blame and control to creating a long-term, certain and stable regime which enables individuals and hard-working families to plan for their futures with confidence.