Don’t laugh but I think a row over how much we are allowed to save into pensions might just decide the next election. Ok, maybe it won’t be pensions themselves that hold the keys to No 10 but what this particular pensions policy tells us about the intentions of our two main parties. I said don’t laugh.
How has the lifetime allowance tax charge, paid by only around 8,000 people a year, become such a crucial battleground between the Conservatives and Labour?
Just like inheritance tax – which is paid by just 4 or 5pc of estates each year – this is about aspiration and a perceived attack on wealth, hard-earned or otherwise. Rumours that Rishi Sunak is considering a similar giveaway for IHT comes from the same starting point and god knows the Tories have to do something pretty spectacular to turn around their dismal polling numbers.
Jeremy Hunt made no secret that part of the reason he scrapped the lifetime allowance in last month’s Budget was that it was having the perverse effect of encouraging senior NHS staff out of the workforce. In my view this is almost entirely the reason for the change, whatever the Chancellor may say.
He will no doubt claim that scrapping the cap proves the Tories are the “party of aspiration” but the reality is that, like politicians before him, he has not worked out a way to make changes that are fair to both people with defined benefit plans and defined contribution pensions. That meant he had to scrap the LTA for everyone even though it makes very little fiscal sense to do so.
In 2020-21, the most recent year we have HMRC data for, the LTA tax charge raised £382m for the Treasury. It’s true that even nearly £400m could reasonably be considered pocket change when you look at the sums the Treasury deals in day to day. But the tax take from the LTA was on the cusp of becoming bigger. A lot bigger.
In 2020-21 just 8,000 people were caught, but consultancy LCP thinks as many as two million savers have passed or are approaching the £1.073m cap. These people were yet to trigger a tax bill, and appear in official figures, but they would have sooner or later. The scale of this is no surprise, the LTA had roughly
halved in nominal terms over the past 11 years and was frozen by Hunt’s boss, Rishi Sunak. Truly gargantuan sums have been given up by the Chancellor.
The Office for Budget Responsibility estimated 15,000 people will remain in employment or go back to work as a result of the policy at a cost of £825m. Even at this conservative estimate (in the light of LCP’s projections) that works out at £56,000 per person who agrees to keep working.
You can see why Labour jumped at the chance to have a pop at how out of touch the Government has become.
Rachel Reeves, the shadow chancellor, walked straight into Hunt’s trap and immediately said Labour would reverse the move because it was “the wrong priority’ and a “huge handout to the richest 1pc of pension savers”.
My colleagues at the Telegraph quickly uncovered how Sir Keir Starmer’s own unique pension arrangement does not have a cap at all, because it does not benefit from tax relief on contributions, and so would be unaffected if Labour reimposed the LTA.
Of course, we are yet to know what the electorate thinks of all this or if the general public have any view on it at all. I suspect that if anyone not working in the City of London has pondered this at all, they will be in favour of the Government’s plan. A carve out for NHS staff along the lines Labour has proposed as an alternative is clearly unfair – one trend that has cut through is just how much more generous public sector pensions are.
Why should someone who has squirrelled away diligently for years at the expense of jam today, find tomorrow’s jam gobbled up simply because their investments performed “too well”.
In any case, if nearer the time Labour looks like winning the election, you can bet on hundreds of thousands of savvy people stuffing their pensions by any means necessary and then cashing their pot in before the law can be changed again.
Again, the parallels with IHT are clear. The super rich pay a far lower rate of IHT because they can afford expensive tax experts who can navigate the many loopholes. That leaves the comfortable but essentially middle classes (at least in London and the south east where property prices are stratospheric) paying the highest effective rates.
If I was advising Labour, I would remind them that Blair and Brown pledged not to increase income tax and to cut some VAT in their 1997 manifesto – and then kept that promise.
Targeting pension savings, whether you deem them the legitimate target of the “richest 1pc” or not, is not the right policy.