United Kingdom

BEN WILKINSON: Cutting pension tax allowances would punish the prudent

I've lost count of the number of times experts and government insiders have declared an imminent shake-up of pension tax relief.

An assault on retirement savings was rumoured yet again this week, amid reports that the Treasury is looking at chopping back pension tax allowances to help fund the nation’s Covid-19 recovery.

But here’s why it will (or perhaps should) never happen: it would serve only to punish the prudent and could cost the Government more in the long run.

Pension raid: The Treasury is rumoured to be looking at chopping back pension tax allowances to help fund the nation's Covid-19 recovery

The most persistent story is that tax relief of 40 per cent for higher earners will be scrapped and a flat rate of perhaps 25 per cent introduced for all savers. It’s argued that this would be fairer to those who get only the basic 20 per cent currently.

Introducing and administering this would be a bureaucratic nightmare, and would create funding trouble for generous public sector final salary pensions, too.

Let’s not forget that savers only benefit from tax relief on the money they put into a pension. They still have to pay income tax when it comes out the other side. 

Cutting relief would mean high earners are eventually taxed twice.

The other idea that has been mooted is slashing the lifetime allowance from more than £1 million to as little as £800,000. The cap limits the amount you can take out of a pension before paying a tax charge.

Reining in the lifetime allowance would arbitrarily penalise smart saving and investing. It would also hit senior public sector workers hardest — likely driving NHS doctors and top civil servants to early retirement. 

The pensions system is old and confusing, and could do with an overhaul. But attacking savings now doesn’t make financial or political sense.

If workers do not see pension saving as worthwhile, they’ll need to rely on the taxpayer later in life. 

Recovery from the pandemic will hopefully be short-term, but damage to pension saving could have implications for decades to come.

It’s unclear why these short-sighted suggestions keep being leaked. Perhaps it’s to give the pensions industry something to talk about? But every time these policy ideas are floated, the Government undermines our confidence in pension saving.

The real problem with pensions is not that people are using them to dodge tax, but rather that most of us are not saving enough.

Bring back cash

As the new £50 note comes into circulation today, many of us will be wondering how much of a future there is for cash.

Our story today reveals how shops are still routinely turning away customers if they try to pay with coins and notes. 

This is despite scientific research finding that you are more likely to catch Covid-19 from breathing in a shop than you are from handling cash.

Yet signs remain outside stores across the country warning people that cash will not be accepted.

If shops are safe enough to reopen, there is no real reason why customers should be prevented from paying with cash.

The Government needs to push ahead with laws to protect cash, so we all know where we stand.

Train to nowhere

Details of new flexible season tickets for commuters finally emerged this week.

The inexplicable cost of train travel has no doubt put many workers off the idea of returning to the office.

It was hoped that flexible season tickets would help soothe the strain of the commute, but the fares on the table are anything but world-shattering.

Those travelling from my nearest station to the capital will only really benefit if they go into the office just two days a week.

And even then, the cost of these tickets is only 12 per cent less than the cost of an ordinary one.

For those who want to commute three days a week, it will be better to stick with a seven-day season ticket, which is nearly £10 cheaper.

I suspect the rail companies will need to do more.

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