If George Osborne has to clobber pensions it’s better he trimmed the contribution limit than abolish high-rate relief. Another desperate chancellor can cut the relief rate later.
Osborne’s Autumn Statement reduced the amount that can be put into a pension each year from £50,000 to £40,000. For someone on 40 per cent income tax contributing the maximum, that will save the Treasury £4,000 a year. If instead, the limit had been limited to the basic 20p tax rate, that person putting £50,000 into his fund would have lost (and the chancellor gained) £10,000. Even a 40 per cent taxpayer making a £25,000 contribution would be £5,000 worse off is the relief was limited to 20 per cent.
So while there is no logic in giving higher tax relief to higher earners, limiting the maximum contribution hits people less – especially those not able to contribute the maximum.
And most high-earners would still put money into a pension even if the relief was reduced – whereas removing the benefit on anything over £40,000 will probably stop them investing anything above that at all in a pension.
That may explain why Osborne made this choice. In the long-term a responsible chancellor wants people to provide for their own old age and to have a nest egg that can offset redundancy – but in the short-term the Treasury would like us to spend our spare cash rather than invest it in stockmarkets.
Reducing the ceiling on pension pots is a further disincentive to put money away. We used to allow a £1.8m pot: now the limit is being cut further from £1.5m to £1.25m. That may sound a lot, but with annuity rates so low, it could buy a pension of less than £65,000 – perhaps half the final salary of a high-flyer.
Not many people can put more than £40,000 into a pension every year, of course, but Osborne’s cut will affect those people desperate to make one-off top-ups to pensions pots from other savings – or from inheritances – before retirement. When the annual limit was £250,000 it was almost hypothetical; now it will trap many in their 50s and 60s.
But the new limit does not take effect until 2014/15. There will thus be a rush to cash in investments and squeeze incomes to put the £50,000 maximum into funds before then. However, that will increase the amount of relief claimed, reducing tax revenues, while hitting consumer spending. So while trying to cure our economic woes, Osborne will have made them worse.