Rachel Vahey is fed up with pensions being seen as a cash cow and makes a plea for a sustainable environment in which people can securely save for their retirement.
I remember the days – way before pension freedom was even a glint in George Osborne’s eye – when sat around the table with Treasury staff, pleading with them for more flexibility for annuities, we were always rebuffed with the same argument.
“The government allows very good tax relief on pensions. But the deal is people have to secure an income for life with the pot. That way they never fall back on the State and become a problem.”
Of course, pension freedoms have blown this deal out of the water. Now – or at least in three weeks’ time – you can do anything you want with your pension pot. You are no longer constrained.
But it was naive of us to think that meant the original argument no longer stood. Of course it did. If the government took away one side of the bargain – the need to secure an income – then it makes sense they would take away the other side of the bargain – the very good tax relief. That makes perfect sense to those in the Treasury.
"The pensions freedoms will render a massive tax take for the Treasury."
And that’s what has happened. The quid pro quo (or so the Treasury sees it) of giving us pension freedom is less tax relief on pensions.
There is no way they were going to cut or even remove tax-free cash. That is one big sacred cow. Too many people would notice. Instead, the government is to take the idea mooted by both Labour and the Lib Dems, and cut back the lifetime allowance (again) to £1m.
But this is not a quid pro quo. This is not the Chancellor giving with one hand as he takes with another. This is about him grabbing tax from pension holders with both hands. The pension freedoms will render a massive tax take for the Treasury. And cutting the lifetime allowance to £1m will dish up a hefty £2bn according to the Treasury’s figures.
But this is a rate where it seriously begins to eat into ‘ordinary’ people’s funds. MGM Advantage reckons a 50 year old today with a pot of £596,000 could breach the limit at age 65 even if they make no further contributions (assuming 6% growth after charges and the LTA increases by 2.5% a year after 2018).
If the government had opted to get rid of the lifetime allowance altogether I would have had more sympathy. After all, why do we need it when we have a limit on contributions?
We are no longer at the thin end of the wedge. The lifetime allowance is being carefully whittled away, and will continue to do so. It is very easy to envisage a new Labour government announcing a further cut to £750,000 in their post-election budget. The only sticking point being at that rate it will start to make considerable inroads into public sector pensions, where the, quite frankly, daft conversion rate of 20:1 will fail to protect them from losing their money to the taxman, unless they opt to protect it and to stop accruing benefits.
I am fed up with pensions being seen as a cash cow. I passionately believe in helping people save for their retirement. There are more of us getting increasingly older. We cannot work until we drop. We need an income in retirement. And we need to be able to plan this without the rules changing every five minutes.
This should not be about May’s election, about bringing in policies to appeal to the grey, and not-so-grey, voter. This should not be about pinching the opposition’s policies just to score points. And this should not be about shoring up the Treasury’s coffers by picking on the oh-so-easy target of big pension pots. The focus should be on creating a sustainable environment where people can build up money for their retirement, and then are given a choice over how to best spend it over their remaining lifetime.