“Promise made, promise delivered,” was George Osborne’s puffed appraisal of his inheritance tax move, which will add a £175,000 allowance for bequeathed family homes on top of the existing £325,000 threshold.
And this, as we know, has been largely funded by twiddling the dials on the Treasury’s pension spending.
Osborne’s Budget delivery was slick, strident and contained some cleverly timed motifs from his spring Budget speech. “We should always fix the roof while the sun is shining,” he said, illustrating the progress made on the nation’s debt since then.
The BBC’s coverage of the self-assured performance was pleasingly tempered by the near-heckling from Nick Robinson and Robert Peston scrolling across the bottom of the screen.
They were right that the green paper shifted the focus of tax relief. Discussion up to now had centred on whether there should be a flat rate and, if so, what that rate should be.
At present, pension contributions are exempt on the way in, exempt while invested and taxed on the way out – known as EET. But the proposal to flip this on its head raises several questions.
Illustration by Ben Jennings
One key issue is around incentivisation – the primary purpose of pensions tax relief.
The phasing-up of auto-enrolment minimum contributions, coupled with an added tax hit, could catalyse swaths of opt-outs.
Another concern for schemes would be the demarcation between current pension savings and potential TEE-structured pots. As well as posing practical difficulties, the administrative and cost burdens could prove vexing for employers.
The proposal for TEE also moots some sort of government top-up to cushion any scrapping of upfront tax relief. But it’s not clear whether this would be anywhere near commensurate with the loss.
What’s also unclear is how members can reap as much benefit from investment returns and compounding should there be fewer contributions going in.
There are many more questions besides, all of which have led to an appropriate cynicism of the use of the word ‘simplification’ in the green paper.
Maxine Kelly is editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert
