Few people know whether Chancellor George Osborne’s pension freedom fantasy was created through mistake, deception or a long-term conspiracy to do away with pensions altogether. Whatever Osborne’s reasoning, it certainly earned him a spectacular amount of feelgood headlines in the press in the run-up to the 2015 General Election.
But the policy effectively gave everyone over the age of 55 an extra £2,500 income tax allowance and £10,000 exemption from employer and employee NI – with four times this amount of relief available in the first year. By opting to be paid through pension via salary sacrifice rather than 100 percent through salary, an individual on £40,000 could cut their total tax and NI bill almost in half, from £9,845 to £4,997, under 2014 tax rates. Factoring in lost employer NI, the total cost to the Revenue would be £5,484, a loss off 62 per cent.
Very few people have taken advantage of this massive loophole to date, but just because, as the consultation says, only 3 per cent of over 55s are contributing more than £4,000 into DC,it doesn’t mean people aren’t already using the freedoms. One provider tells me that the scheme it runs for a large retailer has seen significant withdrawals of cash by over 55s. And in September Prudential launched a ‘money-in, money-out’ pension account that facilitates saving and withdrawing from a pension without having to cash in or cancel the whole account. It would be unfair if people who have used freedoms to date were penalised with a £4,000 MPAA going forward.
Leaving that amount of tax and NI relief on the table is not good fiscal policy, and Chancellor Philip Hammond had no choice but to close this loophole at some point, even if it does seriously damage the pension freedoms’ policy objective of facilitating flexibility in later working life.
So closely guarded was this revolutionary policy that it may well be that the hole in it was not spotted. That is the view Corporate Adviser took back in 2014. Certain commentators, such as the CPS’s Michael Johnson, see pension freedoms as a stepping stone towards an Isa approach. We should also not discount Osborne’s view that people should be given the right to do what they want with their pensions, and the general loathing of annuities. All of these were probably factors.
So pension freedoms remain half in place – for those who have genuinely got to the end of their working life, they offer great flexibility. But for many of those with years still left to contribute, pension freedoms is a thing they will have to wait for.