Does anyone care about retirement?

FROM the moment the Chancellor stunned everyone with his bold reforms on pensions in 2014, it seemed inevitable that further radical change on retirement saving would follow.

And so this week George Osborne ushered in the possibility of a second pensions revolution. This time though – rather than liberalising a broken system, the Treasury risks killing retirement saving for good.

In the Budget the Chancellor said: ‘Pensions could be taxed like Isas. You pay in from taxed income – and its tax free when you take it out. And in-between it receives a top-up from the government.’

Publicly the intention of further reforms is to make retirement saving fit for the modern day. Privately though, it is about saving some – if not all – of the £34billion the Treasury spends on pension tax relief each year. This is a pot of gold for a cost-cutting Government.

Currently, whenever someone pays money into a pension they get back the income tax paid on their earnings. So when a basic rate taxpayer saves £1 in to a pension, 80p comes from their own funds and 20p from the Treasury. A higher rate taxpayer pays only 60p gets a 40p contribution from the Treasury and top rate payer just 55p, receiving 45p in tax relief. It’s a huge perk of the tax system.

The previous pensions minister Liberal Democrat Steve Webb advocated a flat rate of pensions tax relief of 33p for all, and this option has not been totally dismissed.

But whispers from Whitehall are that young Treasury officials are talking about scrapping all tax relief. They seem to want a type of retirement Isa – where you don’t get a tax top up, but the money taken out is tax free.

They probably don’t care deeply about the future of pensions, they just want to save their boss money.

But how we save for our retirement should not be dictated by civil servants whose own generous pensions are funded at our expense.

A retirement Isa could prove a disaster for future and for current savers, who have already put billions in pension funds. With hardly any or no State top-up, there would be little incentive to save for old age – even if employers continue to make a small contribution. Tax relief, or some kind of tax-top-up is how the nation rewards the diligent. Without it, young workers will sacrifice saving and, in the end, it will only increase the burden on the State.

The impact on existing pension savers could also be dramatic. History has shown that when savings schemes are closed to new business, whether it be with-profits plans, older pension schemes, or child trust funds, the funds in them are left to whither away. Hundreds of billions of pounds in current schemes could become trapped in one of these ‘zombies’.

With so much money up for grabs it seems unlikely that all the tax breaks savers currently now enjoy on pensions will last. Other radical plans are also on the table.

But whatever the Chancellor decides – saving for retirement is likely to change forever.