David Prosser: Raid the pensions piggy bank in this age of austerity

Outlook: Only one in seven savers paying the higher rate of income tax while still working continues to pay higher rate tax once they have retired
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The Independent Online

It has taken him more than a year, but our cash-strapped Chancellor of the Exchequer finally seems to have realised that pensions policy could make an important contribution to his efforts to get on top of the public finances.

Not public sector pensions, where the reforms are provoking such fury from the trade unions, whatever their rights and wrongs, and will not generate savings for the Treasury for many years to come. No, if the Westminstergossips are to be believed, George Osborne has something else in mind: a raid, as it would no doubt be characterised, on tax relief for higher-rate pension savers.

About time too. Cutting back on higher-rate tax relief would certainly be unpopular with the millions of savers who would be affected, let alone the savings industry, which earns big money from this racket. But in this age of austerity, the arguments for subsidising the pension contributions of higher earners to the tune of 40 per cent look tougher than ever to make.

To put the figures in context, the Centre for Policy Studies says the cost of pensions tax relief is around £30bn a year. That's the cost, mind you, of paying incentives to all savers, including those on basic-rate tax and employers contributing on behalf of staff, but equates to more than half the total budget of the Department for Education and a third of the NHS budget.

Moreover, the lion's share of this huge sum is accounted for by the cost of relief for the wealthiest savers. The TUC reckons the richest 1 per cent of the population grab a third of the tax relief – new caps on pension contributions will address the inequality to an extent, but we will still be offering the largest incentives to save to those who are already most able to do so.

The pensions lobby argues that the idea higher-rate taxpayers get more than their fair share is undermined by the fact that they go on to pay more than their fair share in old age – that they get higher-rate relief while contributing, but then pay higher-rate tax when drawing a pension.

That argument would have greater merit, however, if thestatistics did not show only one in seven savers on the higher rate while still working continues to pay higher rate tax in retirement. And that's leaving aside the generous provision that allows pension savers to take 25 per cent of their funds as a tax-free cash lump sum on retirement.

We shouldn't cancel all pension tax breaks – at least not immediately – though there does need to be more work on whether this system of reliefs simply encourages people to save money in a pension scheme that they would have put by in any case. However, there is a strong case for recouping the £7bn or so a year we spend on pension tax breaks for individual higher-rate taxpayers (not employers).

There is no shortage of options for what to do with the money. At the extreme, it could simply be ploughed into the deficit reduction programme. Alternatively, it could be used to help pay the growing cost of state pensions – or put towards the cost of a shift towards Plan B for the economy; £7bn is enough to pay for half the VAT cut proposed by the shadow Chancellor, for example.

Will Mr Osborne have the nerve to go for it? Well, officially the Treasury says its policy is unchanged, but behind the scenes the idea of limiting tax relief for higher-rate taxpayers is now being floated. If he goes for it, the Chancellor can expect to face a great deal of hostility, including criticism from Conservative colleagues. He will need guarantees of total support from the Prime Minister.

It would be, in other words, a huge political risk. But a saving of £7bn a year is a prize to justify such a gamble. And he would be in the right.



Insurers get it in the neck once again

What has Britain's insurance industry done to upset the regulatory authorities? Though the insurance sector, at least in this country, emerged from the financial crisis almost unscathed, one could be forgiven for assuming insurers played a leading role in the credit crunch, such has been the regulatory backlash against them ever since.

It began with the last Government, whose initial proposals for a tax on bankers' bonuses would have seen the levy applied toinsurance company executives, too – mainly because the Treasury was concerned the banks might otherwise simply restructure key operations as insurance companies in order to get round the tax.

That proposal didn't make it on to the statute book in the end, but insurers have continued to find themselves at the mercy of regulatory reform. Yesterday, Hector Sants, the chief executive of the Financial Services Authority, warned insurers they may face even greater regulatory scrutiny than the banks because of the promises they make to policyholders about payouts in the future.

One example of this approach is the Financial Services Authority's warning that it will push ahead with implementing Solvency II in 2013, even though the European Union has suggested the new rules on how much capital insurers must hold may now be delayed.

In effect, this means the UK is likely to be a testing ground for the EU's attempts to improve capital funding, with British insurers required to move on to the new standards more quickly than their continental European rivals.

Compare this situation to the banking sector, where the British approach is instead to challenge any European attempt to water down or delay the standards agreed on capital.

Clearly, the size and scope of Britain's insurance sector renders it of systemic importance. It thus could not have hoped to escape the reform process entirely. But some insurance executives are beginning to wonder why they are now being expected to move more quickly than the banks. It is difficult to provide them with a convincing answer.

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