This Budget cannot be the final chapter in the Chancellor’s planned overhaul of pension incentives – unless the Brexit referendum goes against him says John Greenwood
As pension professionals, it is hard to take seriously the recent media coverage of Osborne’s Budget shortcomings. We all know he plans to take at least a few billion pounds from pensions to plug the gaps once Brexit is out of the way. The idea that this Budget is the last chapter in the overhaul of pension incentives is not credible.
The Lifetime Isa launch – thanks, by the way, to the Treasury for reminding us in that life ends at 50 – has cost the Chancellor money, not saved it. According to the Treasury, combined with the extension of the Isa limit to £20,000 it will cost £2bn by the end of this Parliament. Together, these two initiatives show that, surely, the future is Isa.
ABI director general Huw Evans has said as much – that the Treasury had been leaning towards a wholesale destruction of pensions tax relief until fears of upsetting anyone ahead of Brexit prompted a pause.
So what many of us have half-expected for some time looks like coming to pass. The questions now are over the timescale and extent of the reforms. Does the targeting of the under-40s in the first phase hint at a graduated switch to TEE? The Chancellor could move those under 40 into a Lifetime Isa structure for auto-enrolment, and remove tax relief, without generating much political flak. Under-40s generally earn less so fewer will miss higher-rate relief, and they are further from retirement so will not be as engaged in their retirement savings as older workers.
But such a move does little for Osborne’s deficit reduction plans. Unable to call on the horn of plenty that is pensions tax relief, the Chancellor has had a torrid Budget. Only five months ago he took his foot off austerity with a £27bn windfall; now he is talking about more cuts, with the OBR predicting he will miss his own deficit reduction target.
That points to game on for the removal of pensions tax relief – as soon as Brexit is out of the way. But that assumes Osborne will still be in Number 11 by the time of the Autumn Statement. With Tory tempers running high a victory for the Outers could prompt a swift leadership election and, if that happens, how Osborne may regret not having gone for a Pension Isa sooner.