With the Autumn Budget looming, the spectre that has been lurking for years is beginning to look more fully formed: the government will change pension tax relief.
Next week chancellor Philip Hammond is faced with the daunting task of delivering a big, bold Budget in a challenging, to say the least, political and economic environment. He does not have time to wait for his next Budget in November 2018 to do something. The time is now.
Hammond has committed to reduce borrowing to less than 2% of national income by 2020-21 and eliminating it completely by the mid-2020s.
He is also facing public sector pay pressure and a multi-billion Brexit divorce bill. He’s got very little room to move.
No room for reductions
Some have been quick to dismiss the idea of major reforms, referencing a speech made by the secretary of state for work and pensions David Gauke in the summer, where he gave a forthright view that there would be no fundamental change.
Those who believe this expect more changes around the edges regarding the annual allowance and the lifetime allowance.
However, these have already been significantly reduced for the gain of £6 billion per year. There is no room left for further large reductions so any further changes will only have a marginal impact for the chancellor.
Commons paper proposals
The problem is pension taxation does not ultimately sit with Gauke and his department. It sits with the Treasury and it is not obliged to consult before making changes. It was only a few years ago when George Osborne blindsided Iain Duncan Smith with his freedom and choice changes.
The public simply cannot reply on Gauke’s comments. The question then is, what kind of change can we expect?
At the end of October the House of Commons library updated its paper on how pension tax relief could be reformed.
The paper points out that the pressure for more fundamental reforms has been growing. Two reforms outlined are: a shift to a single rate of relief, and moving to a taxed, exempt, exempt system (just like the ISA regime).
Curbing national insurance
A radical option, not outlined in the House of Commons paper, would be to curb the employer national insurance exemption.
The estimated cost of this is around £15 billion a year on latest figures, although this figure should be taken as a broad estimate. For example, it is based on an estimate of how much would be raised if both employer and employee national insurance contributions were levied on the employer contribution.
Whatever the true cost is it will continue to go up as minimum contribution rates under auto-enrolment increases in 2018 and 2019.
Cutting this relief would reduce the cost of tax relief but is unlikely given that the chancellor has already lost one battle to change how national insurance works for the self-employed. I doubt he has the stomach to try again.
Ian Browne is a retirement planning expert at Old Mutual Wealth.