Life & Culture

Who will save your savings?


Bill Clinton's famous election adage ''it's the economy, stupid,'' that carried him to two terms at the White House, remains highly relevant in Britain's general election.

Whatever people may say to the pollsters among the chattering classes and the clusters of people gathered at kiddush and Jewish gatherings in London and around the country, concern about Labour and LibDem ideas for a "Mansion tax" run deep. Indeed, there already are signs that it is having a depressive effect on the housing market.

Yet, however poisonous this may seem it would initially have an impact on only a very small group of people. Far more worrying for the majority of households saving for the future, through pension plans, is the potential assault on retirement.

George Osborne and the Tories launched a savings revolution in the March 2014 Budget when they swept the requirement that retirees can only remove 25 per cent of the funds from their pension pot in cash and the rest has to be used to buy an annuity. From April 5 this year it has become possible to take the whole pot in cash, giving people the right to spend their savings as they like (after a heavy tax charge). At the same time, the Isa allowance was raised to £15,000 a year and much more flexibility in transfers between types of Isas has been introduced.

All this is well and good and has meant that people currently retiring will not be restricted to the paltry returns on annuity policies that have come about as a result of six years of record low interest rates.

Less fortunately, especially for better-off pension savers, the political classes have been alerted to another important fact.

At a time when all the parties are generally being shy about anything more than symbolic increases in taxes (Labour says it will restore the 50 pence in the pound tax rate for people earning over £150,000 a year) they have their eyes on one large untapped pot of gold. That is the £30 billion in tax breaks that currently goes to people who save through pensions. Conservatives have begun the process of whittling this down by reducing the ''lifetime allowance", the tax advantaged sum you can keep in a pension pot, from £1.5m to first £1.25 million and then £1 million. It is pointed out that this will only affect a limited group of people (the same argument made by advocates of the mansion tax) but it is nevertheless an assault on pension savings by the party which claims to be the friend of the nation's silver army.

The weakening by the Tories of the tax reliefs available to future pensioners is unhelpful. It is also terribly confusing for a party which makes the claim of being their friend.

More worrying is the hand of Shadow Chancellor Ed Balls. He already has warned that the very highest rate payers will no longer receive relief at the rate paid. The suspicion is that a Labour government might well choose only to offer tax relief at the basic rate to all pension savers, releasing big sums to spend on the NHS and welfare budgets.

Labour has form on this. In 1997 Gordon Brown and Ed Balls were architects of a measure that removed the tax relief on dividends paid into corporate pension funds. The cash paid for a laudable programme to help young people into the workforce. The consequences were catastrophic in that it was among the factors that led many large companies to end the "gold standard" final salary pension schemes that covered much of Britain's workforce. It has been estimated that the move, which gifted the Labour government £6 billion in the first year, has cost corporate plans well in excess of £100 billion and led many companies to switch to the less reliable and less costly defined contribution plans.

One organisation that will certainly have few regrets about the gradual abolition of the various pension tax reliefs is the Treasury. It has long been doctrine in Whitehall that such allowances distort fiscal policy. That is why the Tories were instrumental in ending Miras, the tax subsidy for people buying a home with a mortgage, which was abolished finally by Gordon Brown in 2000.

What we know from the 1997 experience is that however well-intentioned the motives of those making pensions policy the risk of unintended consequences is huge. It is often forgotten by policymakers that aside from the "tax free" lump sum, money coming out of retirement funds attract income tax, like in-work earnings. So the subsidy is partly recovered.

More serious is the impact on the pension savings habit. If incentives are removed, as Labour is proposing to do, the likelihood is that some of the burden of supporting incomes in old age will fall back on the state.

That is an outcome no one will welcome.

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