“Is there an election coming?” asked the former Lib Dem pensions minister Steve Webb today, shortly after the Chancellor, Jeremy Hunt, announced a change to pensions that abolished the lifetime allowance, effectively allowing higher earners to put as much into their pensions as they like without it being subjected to tax.
The lifetime allowance rule was introduced by Gordon Brown in 2006. It targeted the very wealthiest by capping the amount they can save into a pension at just under £1.1m, after which point they are hit by a tax of either 25 per cent or 55 per cent, depending on how they withdraw the money. Now, in what Hunt insisted was an effort to prevent NHS consultants from disappearing into early retirement once their pension pots were filled, that will no longer be the case. Those who would previously have hit that cap can breeze past it, safe in the knowledge that they won’t be taxed on that particular portion of their income until such time as they choose to withdraw it.
In a Budget that was looking hopefully progressive – with childcare reforms, an extension of the Energy Price Guarantee and new rules around prepaid energy meters intended to help those on low incomes – this stood out as a regressive beacon, a neon signal to the Conservatives’ traditional voters (older, wealthier) that they are being looked after.
Ultimately, the people doing the looking-after are taxpayers. According to the Treasury, by 2027-28 the measure will cost £835m a year – or £2.75bn over five years, according to the Social Market Foundation. In other words, £2.75bn that should have gone into government coffers will instead have gone into the pension pots of the highest earners. “The state as a whole will now be paying 40 or 45 per cent tax relief on whatever a wealthy individual wants to save,” observed the BBC economics correspondent, Andy Verity.
It is also worth pointing out that, whether intentional or not, Hunt’s decision to scrap the lifetime pension allowance has provided the rich with a sneaky loophole to avoid inheritance tax. Inheritance tax is not paid on pensions – meaning a person wishing to pass on their wealth could, potentially, fill up their pension (tax-free), then pass it on to their children (tax-free). There are restrictions – those earning £260,000 or more will be subjected to the annual allowance, which restricts how much can be saved – but for the most part, the only tax that would be paid would be when their children go to withdraw money, at which point the first 25 per cent is also tax-free.
Paul Johnson, director of the Institute for Fiscal Studies, described lifting the allowance as using a “sledgehammer to crack a nut”. It is “a lot of money to allocate to a small number of people with huge pensions,” added James Kirkup, the director of the Social Market Foundation. “Instead of piecemeal reform that benefits a handful of very rich people, there should be a wider review of the tax treatment of pensions that encourages higher pension savings for millions of workers who will rely on private pensions when they reach retirement.”
But, as Webb suggested, there is an election coming – and God forbid Conservative voters should feel left out in the cold.