There’s an awful lot of fuss around pensions at the moment. I’m not going to complain about that – we’ve been making a good part of that fuss.
We are angry about the Lifetime Allowance reduction to £1m (it was £1.8m as recently as 2010). We are angry about the very existence of the lifetime allowance. It’s confusing. It’s badly thought out. It’s just stupid (our full thoughts on it are here).
We are irritated by the cut in the annual allowance for high earners down to £10,000 a year (most people are only super-high earners for a few years). We are concerned about the “progressive” nature of Osborne’s plans for the next Budget (most people think that tax relief on pensions will be cancelled in favour of a flat rate rebate). And we are bemused by the way George Osborne has turned saving into a pension into the best inheritance tax avoidance vehicle the well-off could ever have dared to dream about.
But here’s the thing: we think we get what George Osborne is really trying to do – but doesn’t dare say. And if we are right, it all makes some sense.
Look at it like this. What is the point of pension tax relief – of encouraging people to save into wrappers that lock their money up until late middle age? It isn’t to make sure everyone lives in the lap of luxury forever. Far from it. It is to make sure that as many people as possible have high enough incomes in retirement so as not to be a burden on the state.
It just doesn’t make any sense for the state (aka other taxpayers) to subsidise any savings beyond that – and it doesn’t make sense for those of us demanding a low-tax state to ask for subsidy beyond that.
The important question here then is this: just how much of an income do retired people need to not be a burden on the state? My guess? Include the state pension, and they need £20,000 tops (no benefits would be payable beyond that level).
So what Osborne is surely – completely rationally – trying to do is to cut everyone’s ability to save using tax relief down to a level that brings in this kind of income. £1m brings in an annuity payment of about £35,000 a year.
I’m not sure Osborne is going about all this reform in anything like the right way – all this complication is both exhausting and offputting – but if he is doing what I think he is doing, he definitely isn’t done yet.