The government needs cash to fund the NHS. Jonathan Stapleton says pensions tax relief may prove to be an irresistible target.
In what looked like a classic kite-flying exercise in the Sunday papers, chancellor Philip Hammond was reported to be considering either cutting the rate of pensions tax relief or reducing the annual allowance in his budget on 29 October.
The Telegraph report cited a "senior Treasury source" as claiming the £39bn annual cost of tax relief could not be ignored when seeking methods to fund a £20bn funding promise for the NHS.
Such speculation ahead of a budget is not new - and seems to be repeated every single year. This time, however, could be different.
The government's wide-ranging 2015 consultation on reforming pensions tax relief - Strengthening the incentive to save - examined whether there is a case for overhauling the current EET system of tax relief, where relief is given on contributions and investment income but the benefits on retirement are taxed.
However, in his Budget 2016 speech the then chancellor George Osborne said it was "clear that there was no consensus" and said there would be no reform.
Yet, while there still may be no consensus on whether there should be reform - or, indeed, what any reform should look like - there are some good reasons the government may well be considering it now.
First, is the huge amount of money on the table… A £5bn or £10bn windfall would pay for a lot of doctors and nurses, especially in the run up to what promises to be yet another NHS ‘crisis' this winter.
The other reason the government may wish to consider change is for equality - currently most of the pensions tax relief available goes to higher-rate earners, meaning it can seem distinctly unfair on the lower paid.
But there is another reason. The current system is complex and doesn't work perfectly - and you only need to look at the current furore over net-pay arrangements to see this.
Some could argue that a well-structured reform of tax relief, perhaps introducing a flat-rate relief with a much lower annual allowance, may well solve some of these issues and make pensions simpler (even if the experience of A-Day simplification would suggest otherwise).
We may hope for no further tinkering in pensions. But the government needs the cash and pensions are a very easy target.
Jonathan Stapleton is editor of Professional Pensions
