Announcement on pension tax relief: what it means for you
The government has made a major announced, on pensions tax relief. In one of his first moves as the new Work and Pensions Secretary, David Gauke has ruled out fundamental changes to pensions tax relief. He admitted that a fragile government working in a loose alliance, this kind of radical change didn't stand a chance. So should we be celebrating? Is this great news for pension savers? Or is it a bit of a blow?
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See also: Queen's Speech: what it means for your money
What changes are being ruled out?
Pensions tax relief has been in the frame ever since George Osborne floated the idea of radical reform as Chancellor. He launched a consultation back in 2015, and it reported in full last year.
There were a number of potential options discussed in the consultation. The most radical was a switch from the pension system (where you get tax relief up-front and then pay tax on pension income) to an ISA system (where you pay tax up front and get the proceeds tax-free). This would cut the cost to the Treasury, but would be a far less generous approach, and there was widespread concern that it would put people off saving for retirement.
The consultation also looked at the possibility of switching from the current arrangement, where you get the tax back at the highest rate you pay (40% for higher-rate taxpayers and 20% for basic rate taxpayers), to a single flat rate of relief. This would ensure that the benefits of tax relief on pensions would be spread far more evenly, and received more support from the industry, but would have been a difficult sell to higher earners.
Other potential changes floated in recent months have focused more on making the system less generous in order to cut cost. They have included the spectre of lowering the annual allowance of what can be saved into a pension, and reducing the lifetime allowance.
Is the announcement good news?
The fact that the government has ruled out a move to a less generous system - at least during the life of this parliament - is good news. Kate Smith, head of pensions at Aegon says: "We welcome David Gauke's comments regarding a period of stability for pensions tax relief. We hope this also means an end to the constant tinkering with the pension tax rules we've seen over the last 10 years. Hopefully this puts an end to speculation about imminent reform which has been unsettling for those saving into a pension."
She adds: "There are a number of issues that deserve more immediate attention such as legislation to tackle pension scams and a the development of a cross party consensus on how to tackle the rising cost of social care."
However, we cannot overlook the possibility that when it eventually comes, a reform of tax relief could actually be structured to benefit ordinary pension savers - and ruling that out is a bit of a disappointment.
Back in 2015, then pensions minister Steve Webb floated the idea of a move to a flat rate of relief of 33% - which would mean that higher earners get less tax relief, but basic rate taxpayers get more. And while there were concerns that such a big change would create havoc for pension schemes and the industry as a whole, there were commentators who felt a simple, easy-to-understand and more generous system could help encourage people to save more.
Of course, this was never a Conservative Party policy, as Webb was a Liberal Democrat, so arguably it was never going to happen. However, it shone a light on the fact that not all changes to pension rules have to leave us worse off. There's an argument, therefore, that while we can be relieved that Gauke has ruled out changes to make pensions less attractive and more complicated - there's also the downside that he's also ruled out the chance to make them simpler and more generous too.