Tuesday, July 16

The chancellor should prioritise savings reform in first budget



If the new Chancellor Rishi Sunak wants to appeal to Tory voters in the shires and the new converts in the Red Wall seats of the North, he should use his first Budget to end the war of attrition on savers.

Thrift and personal responsibility are at the core of Conservative values. They are also very much part of the Labour heritage of co-operatives and mutuals.

Yet in the past two decades, governments on both sides have thrown savers to the wolves.

The repeated attacks on pensions saving have been particularly short-sighted and harmful so the news that Sunak’s £10billion tax grab on higher rate pensions tax relief is likely to be scrapped is welcome.

This was an idea so bad it could have come from the Jeremy Corbyn playbook. Seizing tax relief from higher rate taxpayers would have hurt millions and benefited precisely no-one.

It would have eroded confidence in pensions even further and acted as a brake on aspiration.

It would also have been another blow to savers, who have already seen the rates on National Savings & Investment products cut last week.

Returns on risk-free deposits and on pension annuities are pitiful. In desperation, small investors have been pushed into the arms of the discredited fund manager Neil Woodford, or an array of high-risk schemes advertised online, as we report today.

Blameless savers and pensioners have been made to pay for the financial crisis because of the Bank of England’s policies of slashing interest rates and QE, which flooded the system with money.

The suffering inflicted was deemed a necessary evil, on a temporary basis, to save the economy from worse harm.

But the last thing the Chancellor should do now is hit them again. So why, then, might Sunak even have contemplated it?

Quite simply, the Government, which has called an end to austerity, has to raise money from somewhere. But Sunak has limited room for manoeuvre to raise taxes because hiking the headline rates of income tax and VAT is verboten.

Pensions, however, look like a sitting duck. Unlike petrol or pasty taxes, which are simple and capable of provoking instant uproar, pensions are complicated.

Chancellors can pickpocket them and most people will not cotton on before it is too late.

The rot began under Gordon Brown, who scrapped the tax credit on pension dividends in 1997 and in the process hastened the wreckage of our once gold-standard final salary pension system.

Only pensions mavens (me included) warned about it. The rest of the population yawned, and by the time the damage was clear, it was too late.

It may have gone away this time, but scrapping higher rate tax relief is an idea that keeps recurring. It seems attractive because it would have affected people on more than £50,000 a year, not the lower paid.

But to paint pensions tax relief as a subsidy for the elite is a grotesque distortion. Around 3.85million are higher rate taxpayers, which means there are a lot of losers.

And that is not static. Many of us – up to eight million in fact – are higher rate taxpayers at some point in our working lives, as our earnings ebb and flow.

Scrapping the relief would have had a harsh effect on groups likely to have short periods of high earnings, such as women who take time out to have children.

At the moment, they can compensate for lost time by maximising their pension savings whilst their earnings are high – but slashing the relief would have made it harder. Let’s hope the idea has gone for good.

Pensions are long-term commitments. Savers need stability and simplicity, but there has been far too much tinkering.

A case in point is the complicated lifetime and annual allowances that have plunged high earners into administrative purgatory.

Mucking about with these rules has even created risks in the NHS because they deter doctors from doing overtime.

Instead of targeting tax relief, the Chancellor would do better to scrap these rules, which do far more harm than good.

He should increase ISA limits and launch National Savings Infrastructure Bonds with a decent interest rate, to help finance the grand projects on Boris’ wish list.

No economy where savers are treated as second-class citizens can flourish in the long term. It’s time for a chancellor who shows ordinary small investors some respect.