Chancellor Philip Hammond has been doing his sums, and has reiterated that two thirds of the £48 billion the Treasury spends on tax relief for retirement saving goes to the better-off.
The tax relief bill is set to rise dramatically over the years to 2019, thanks to the six million new workers brought into the pension system under auto-enrolment.
The Treasury documents contain this phrase: “The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”
This might signify nothing. But Tom McPhail, head of retirement policy at Hargreaves Lansdown, who is no slouch when it comes to reading the pensions runes, reckons: “This is the clearest indication to date that the new Chancellor will act to change pension tax incentives. George Osborne left unfinished business… further reform was always a case of when rather than if.”
Tax relief on pension saving for the highest earners has already been slashed in recent years. It is one of the juiciest plums available to a cash-strapped Chancellor.
It’s not just Hargreaves that is feeling jumpy. Matthew Brown, a private client partner at wealth manager Thomas Miller Investment, said this was a “pension bombshell hidden away in a consultation paper” and added: “Higher and additional rate taxpayers should take note and make the most of the current system before the spring Budget.”
And for high earners of more advanced age, this isn’t even the biggest bombshell currently tumbling toward them. There is a proposal that has been put forward to pull the wealthy out of generous defined benefit pensions altogether, and give them lump sum payments instead.
Defined benefit pensions, common up until the 1990s, offer guaranteed, inflation-linked payouts in retirement. Few people under 40 will have one, but City workers in their 50s and 60s may find this idea extremely alarming.
Pension Corporation, the insurance group, proposed the idea in response to an MPs’ investigation into the fate of the BHS and Tata Steel pension schemes.
That inquiry – in which Goldman Sachs banker Michael Sherwood, retail mogul Philip Green and the Pensions Regulator were hauled before MPs – has led to a broader rethink of policy on these older, legacy defined benefit funds, most of which are in deficit. Something must be done.
Pension Corporation earns its crust buying out schemes like this; taking them off companies’ hands for a fee. To do so, it has to insure every person in the fund – that is, promise to pay them a pension for life.
And it has found that higher earners’ pensions can sometimes be staggeringly expensive. The company says: “We typically see a division in smaller pension schemes whereby the top 10% of scheme members (perhaps pensions built up by the CEO, CFO or other senior management) can represent a very significant percentage of the scheme’s liabilities.”
This is especially acute because higher earners tend to live longer. It’s a big enough bill having to pay someone £120,000 a year for life; if that person then lives to 97, that’s a serious wedge.
Pension Corporation suggests an easy way to slice billions off companies’ pensions bills: “Trustees should be able to force a transfer of individuals with large accrued pensions benefits.”
For high earners in financial services, this is a real danger. The five biggest banks in the UK – Lloyds Banking Group, Barclays, HSBC, Royal Bank of Scotland and Santander – all have defined benefit pension funds worth tens of billions. They are some of the biggest retirement funds in the country, in fact, with hundreds of thousands of members.
It would be tough for the government to cut the pension of a middle-class bank teller in Norwich, but relatively easy to take a stick to senior bankers – who probably account for a significant portion of these schemes’ liabilities – especially if the savings are substantial.
Fair? It depends on who you ask. A solution to the DB pensions crisis does need to be found. Fundamentally, there is £1.4 trillion in the pot and a £1.8 trillion bill. Someone is going to lose out.
Changes to pensions tax relief, which applies to all savers regardless of wealth or age, could mean everyone loses out. But the government’s statement to “focus where there is most need” suggests it feels that spending £32 billion a year to give the already well-off more tax relief on their savings seems like a bit of a luxury in the tough Brexit times ahead.
On both issues, critics will argue these ideas are simply unjust. People, whatever their income, have been saving into a system in good faith only to have the rug pulled out from under their feet.
But if pensions cuts must come anywhere – and it looks like they must – then it is difficult to disagree with the notion that the broadest shoulders should bear the most weight.