Philip Hammond is understood to be considering cuts to tax relief for older workers to fund tax breaks for younger people, a move that would ‘smack of ageism’ and cause further confusion, industry figures say.
A year ago, platform provider Hargreaves Lansdown suggested tax relief should be based on age. Under that proposal, all member contributions would be matched by the government less an amount equivalent to the pension saver’s age – meaning the younger you are, the more you get.
But while last year’s Autumn Statement included some pensions taxation changes, it refrained from any contentious tax overhaul.
The problem with using age as an arbitrary cut-off point is that it doesn’t allow for individual differences
Ros Altmann, former pensions minister
New rumours that there are potential Budget plans to introduce age-based tax relief have disquieted industry experts in the run-up to Chancellor Philip Hammond’s first Autumn Budget, due to be revealed on November 22.
According to reports published in The Telegraph on Monday, Hammond is looking into offering tax breaks to workers in their 20s and 30s, paid for by slashing tax relief for older workers.
While the Treasury has not formally confirmed that it is exploring this move, experts are concerned.
Practical and political hurdles
Such a change would not be easy to implement, according to Tom Selby, a senior analyst at platform provider AJ Bell.
“There would be significant practical and political hurdles for the chancellor to overcome in implementing radical tax relief reform now,” he said, noting that it is not clear how applying different levels of tax relief based on age would work for defined benefit schemes, for example.
In addition, “cutting tax relief for people over a certain age risks creating unfairness in the system”, Selby argued. Under such a reform, an older doctor earning £60,000 could get less pension tax relief than a young City worker earning significantly more, he noted.
Selby said: “We currently have a farcical situation where pensions – a product we expect people to commit money to for decades – are subject to constant tinkering, or at the very least the threat of tinkering.”
Changing the goalposts increases mistrust in pensions
He added that this undermines people’s confidence in the system and “leaves people with the sense that valuable pension tax incentives could be ripped away at any moment”.
Indeed, the Financial Conduct Authority’s Retirement Outcomes Review interim report, published in July, highlighted the problem of mistrust in pensions, with people worrying about pension rules constantly changing to their detriment.
Selby suggested that “an independent commission could take a sober, long-term view on the future of the pension tax framework and potentially act as the starting point for achieving cross-party consensus on the issue”.
Kate Smith, head of pensions at provider Aegon, also cited the negative impact such a change would have on people’s perception of pensions.
Many people “find pensions difficult to understand. If you’re changing the goalposts… they’re never really going to get engaged”, she said.
Smith stressed there are “obvious flaws” in the idea of reducing pensions tax relief for older workers. “It’s almost like a working assumption that just because you’re older, you’ve already built up an adequate pension,” she said.
Avoid age discrimination
However, there are many reasons why people of a certain age might not have been able to do this.
Over-75s should benefit from tax relief
From the blog: Life expectancy is on the increase and with it people’s appetite for working longer. The range of flexible decumulation options is also growing.
“During people’s working lives there are times where they can’t afford to do certain things. They might just keep on [saving] at a lower level, but then later on in life [they start] to pour the money into pensions,” Smith explained. “It does sort of smack of ageism.”
Former pensions minister Ros Altmann noted: “The problem with using age as an arbitrary cut-off point is that it doesn’t allow for individual differences.”
She also argued that young people have greater future earning power than older workers: "When you’re young you’ve got your whole life ahead of you… to improve your financial position.”
Altmann said it was preferable to encourage people to keep saving in their later working years, “rather than saying, ‘Well if you haven’t bothered doing it when you’re young, we’re going to give you less incentive now’”.
