Will the Tories kill off pensions industry? – Teresa Hunter

A Conservative majority following the general election means further tinkering with tax relief is more likely, not less so, says Teresa Hunter 

Making promises you don’t expect to keep can prove fatal, as former deputy prime minister Nick Clegg has recently discovered.

In the run-up to the election, the main parties out-pitched each other because none expected to win, thinking they could ditch their dreams after the polls closed and blame it on their coalition partners.

But the Conservatives are in power, without a scapegoat, and we will watch with interest where their £1m inheritance tax pledge goes, along with the promise not to increase income tax, NI or VAT, nor lift the higher-rate threshold to £50,000. And all the while slashing the deficit and pumping money into the NHS.

Do I feel a YouTube “Sorry… sorry… sorry” video coming on? Possibly not, because the Tories also pledged to take pensions tax relief from higher earners, clawing back the annual £40,000 allowance for those earning more than £150,000 at the rate of £1 for every additional £2 earned, until it reaches £10,000 above £210,000. They also promised to abolish the lifetime limit.

Dr Ros Altmann’s appointment as pensions minister, makes tax relief reform more, not less, likely. She was one of the first to bemoan the unfairness of the richest receiving most relief. But I worry about future generations being able to build up any pension at all. It seems self-evident that in a ‘tax relief’ system, those who pay most tax will receive most relief.

Without relief, pensions become irrelevant and the worry has always been that if there was no incentive for those at the top of companies to support pensions, this would cloud their attitude towards the workforce.

True, pension contributions are now effectively compulsory, although at a low level. Will these now be increased? Dr Altmann is a libertarian. Forcing people to pay more doesn’t look like her style. More likely is a battle over pensions tax relief between Tory backbenchers, the Treasury and the pensions minister.

But behind all of this tussling is a higher game plan. Many Government boffins, particularly at the Treasury, would like to see pensions and Isas merged. It could be argued that the recent freedoms, allowing individuals to withdraw their pensions at will after 55, are a first step. Removing tax relief up-front would be the second. There would no longer be any logic in saving in a pension at all.

But there would be consequences. The first would be the end of the pensions industry, already reeling under the blow of the annuity onslaught. Jobs and tax revenue would disappear.

Government would not be able to afford public sector pensions. Schools are having to sack teachers following the increase in NI. The public sector would have to be brought onto an equal footing with other workers, leading to a battle with the unions that might make the 1980s miners’ strike look like a teddy bears’ picnic. On top of this, public sector employers would have to pay significantly higher salaries.

Tax revenue and other boosts that retirees give the economy would disappear if saving for a decent pension became almost impossible. Many would have to work far longer, with implications here too.

Former pensions minister Steve Webb’s idea of having one tax relief rate of perhaps 33 or 30 per cent, has some merits, but it almost begs the question: why bother? If we are going to reform the system then we should go for it. And at the same time merge income tax and national insurance, and stop pretending it is anything other than another income tax.

The Treasury has taken the first step by abolishing class 2 self-employed contributions, no doubt ahead of an NI hike for this group, which will benefit from the new state pension. Do I think any of this will happen? Most experts tell me it has to. I’m more sceptical. Will this regime want to go down in history as the one that ended saving for retirement? It seems perverse, given that they are the party of thrift.

As for NI, while the logic of merging it with income tax is unanswerable, for practical purposes the charade that it is a contribution to a welfare fund has its value. I speak from bitter experience. I have just received a state pension forecast where I have learned that decades of NI have done almost nothing to boost my pension.