Well now we know, according to reports, and it’s even worse than I thought. It seems that chancellor Rachel Reeves isn’t messing about. She’s going for the big one.
I always felt her most likely target was the rule that allows better off retirees to pass on unused pension wealth to loved ones free of inheritance tax (IHT).
This was an easy win for a left-wing chancellor. Reeves could argue that pensions are designed to fund retirement, but wealthy people use them as an IHT dodge.
She could scrap the tax break in the name of social equality and generational fairness, sending the Labour left wild in the process.
I still think she’ll do it, but apparently, that’s not enough.
Reeves wants more.
I expect her to reverse former Tory chancellor Jeremy Hunt’s recent move to lift the pensions annual allowance from £40,000 to £60,000. Again, that will only hit higher earners.
She might even make a grab for the 25 percent tax-fee lump people can draw from their pensions when they retire. That tax break is hugely popular, though, and could backfire.
This left one more pensions tax raid on the table, and that looks like the one Reeves is going for. I honestly didn’t think she’d dare do it.
According to reports, she’s going for our pensions tax relief.
Wow.
This isn’t an original idea. The Treasury sets out this option before every Budget, explaining the pros and cons. So far, no chancellor has dared go there.
Until now.
Starmer and Reeves are desperate for cash, while it will send the Labour left into a frenzy, celebrating what they’ll see as a tax raid on the better off.
Today, when somebody pays into a pension, they can claim tax relief on their contributions. Basic rate taxpayers get 20% relief, which means that for every £80 they pay into a pension, the Treasury lifts this to £100.
Tax relief a vitally important finanical incentive to get people saving for their retirement in a company or personal pension, rather than relying on the state in their final years.
But politically, it’s always had a weakness. The middle class get more tax relief for each pound of pension they pay in.
So a 40% taxpayer only has to pay in £60, to see their pension contribution lifted to £100. An additional rate 45% taxpayer only has to pay in £55.
They pay tax at a higher rate, so get more relief.
You can see how Labour socialists – and Keir Starmer describes himself as one – would see this as favouring the rich. So it could easily go.
As the Express wrote yesterday, Reeves is “expected to consider” Treasury proposals for a flat 30% rate of pension tax relief, applied to all.
This would have a double political advantage. As well as the better off getting less tax relief, lower earners would get more.
Higher and additional rate taxpayers will hate it. They’d lose on average £2,600 a year. The Treasury would love it. It would raise an estimated £2.7billion a year. Possibly more.
I’ve previously pointed that in her 2018 policy document, The Everyday Economy, Reeve’s proposed slashing pension tax relief to the basic 20% rate only.
That would save Labour around £20billion a year, but lifting basic tax relief to 30% would probably win more votes.
It would still be a brutal tax raid on our pensions. Almosts every day, a new survey flies into my Inbox, warning that people aren’t saving enough for retirement.
Now Reeves could be taking the knife to the single biggest incentive they have.
In 1997, directly after taking power, former Labour chancellor Gordon Brown destroyed our gold-plated final salary pension workplace pensions in what remains the most notorious stealth tax raid of all.
Now Reeves looks set to be kicking off her tenure with an equally brutal raid. It’s beyond belief.
It may raise £2.7billion a year, which will disappear into Labour’s spending pot. But the impact on people’s desire to save will be incalculable.
This isn’t a done deal yet. But it’s beginning to look like it.
I thought I was being alarmist about Labour’s plans for our pensions. Now I realise I didn’t make enough noise.
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