However, the debate did not end there. The Labour Party announced plans, should they get back into power, to remove higher rate relief for those earning in excess of £150,000.
This would involve a tapering mechanism to avoid a cliff edge situation, a lot like Alistair Darling’s plans, which were reversed by the coalition government.
Then, just to finish us all off, Ed Miliband said pensions tax relief should be limited to £26,000 per annum – equating to the national average wage.
So where do we start – let’s look at some of the big questions
We are living longer, which in turn means that an ageing population has fewer tax payers to fund the retirement benefits of those retiring. As such the State will be unlikely to provide a level of income that is more than a basic safety net.
My observations are:
The nature of saving is that we can only save what we receive so the process is putting away for tomorrow some of the pay received today. Simplistically therefore, there must be a way to encourage saving – either through fear of not having a sufficient income in retirement or an incentive to save.
The alternative to this choice would be compulsory saving and are we only a step away from this with auto enrolment?
For me the tax relief model has a sense of logic about it and this was echoed in a blog recently published by Dr Eamonn Butler of the Adam Smith Institute. He argues that tax relief is not just a subsidy to encourage saving, it is the logical way of doing it.
If we are to be encouraged to defer the consumption of some of what we earn today then it would be logical that we do not pay tax on it twice. It also follows I think that the tax relief given should be at the level that tax would have been payable.
So if we agree the logic of keeping the link between the rate of tax relief given and the tax rate paid it is then down to the amount of tax relief made available.
As mentioned above the new LTA provides a pension a bit above the average earnings figure and the figure of £20,000pa which the Government has said it is comfortable with for someone to access flexible drawdown is a bit below - is there a logical meeting point?
If the difference is minimal then let’s stick to the status quo – the one thing that is evident is that the pensions industry needs stability – not cash grabs to meet policy initiatives but sensible thought through outcomes that will last the test of time.
Mike Morrison
Head of Platform Marketing
AJ Bell