Beware of chancellors bearing gifts

The Trojans took the horse as the spoils of victory, not realising it contained an advance guard of elite troops who would creep out under cover of night to open the gates and allow the whole Greek army to flood in and take the city.

Any resemblance between this story and recent events surrounding pension tax relief is, of course, purely coincidental. On the other hand…

Just at the point where we have got literally millions of people under 40 into pension saving for the first time, we risk undermining that huge achievement

It is certainly true that many of us breathed a sigh of relief around 10 days before the Budget when the Treasury let it be known that the big, bold, radical ideas for reform of pension tax relief – both the ‘Pension Isa’ and the flat rate of relief for all – had been taken off the table.  

Although there is a strong case for reforming tax relief, there was growing concern that either a complex and damaging reform would be implemented or that the chancellor would use any reform to reduce the tax relief for pension saving by billions of pounds.  

Against either of those measures, a ‘quiet’ Budget when it came to pensions would have been appreciated.  

Pension reform

To return to the classical analogy, it felt like the long and fruitless siege was over and those who wanted to inflict damaging reforms were sailing away.

But in fact the Budget demonstrated that the reformers had not gone away. While the industry was breathing a sigh of relief, an apparently innocuous horse appeared on the quayside marked ‘Lifetime Isa’.  

It looked as though it had nothing much to do with pensions. It was about helping young people who are struggling to get on the housing ladder, and who could be against that? 

Yet the claim that this was largely about saving for a deposit did not even survive the wording of the chancellor’s Budget statement.  

George Osborne was quite explicit that the Lifetime Isa was also about the fact that many of those under 40 “haven’t had such a good deal from the pension system”.  

The documentation around the Lifetime Isa is quite clear that if you choose this product, you don’t have to decide between saving for a pension and saving for a deposit – you can ‘do both at the same time’. 

Lisa vs workplace pensions

In the short term, the worry about this approach is that if the Lifetime Isa catches on, the under-40s may be tempted to put their limited spare cash into this product instead of into a workplace pension.  

And while clearly there is a place for short-term and long-term saving vehicles, as things stand the key difference is that with a workplace pension you get an employer contribution.

There is a real danger that younger workers, nine out of 10 of whom have so far stayed enrolled in a workplace pension following automatic enrolment, will suddenly start to opt out.

Just at the point where we have got literally millions of people under 40 into pension saving for the first time, we risk undermining that huge achievement. 

But the bigger worry is that the Lifetime Isa really is a Trojan horse. After all, if you can save for your retirement with a Lifetime Isa, the argument will run, do you really need a separate pension product as well?  

Before we know it, we could see upfront tax relief switched off on new savings (why do you need expensive pension tax relief if instead you can save in an Isa with a government top-up?) and an end to pension saving as we know it.

Many of us were very concerned that the destination of a Pensions Isa could fatally undermine pension saving in this country. Just because we get there slowly does not make the destination any less unpalatable. We should truly beware of chancellors bearing gifts.

Steve Webb is director of policy at insurer Royal London