Former pensions minister: the future of tax relief
Steve Webb predicts how the Chancellor will change - and reduce - pension tax relief
When a government is in the early stages of thinking about an issue it often publishes a Green Paper. This is a discussion document, usually asking more questions than it answers, designed to test ideas and seek feedback.
Alongside his Summer Budget, the Chancellor has published just such a document titled "Strengthening the Incentive To Save: a consultation on pensions tax relief".
It is being briefed that the Chancellor is "agnostic" about whether or not to change the system of tax relief for pension contributions, and from my experience of dealing with the Treasury I am inclined to believe this.
The current Chancellor's first instincts are those of a politician rather than an economist.
Before any reform idea can gather momentum he will want to know who are the gainers and losers and how the politics work, before getting too bogged down in the technical detail. The consultation document itself says that the right answer might be to leave things alone, but the opportunity is there for those who want to make the case for reform to win over the Chancellor.
So what sort of changes might we see?
In his Budget speech the Chancellor floated the idea of a very gradual move to a new system. Those who already had pensions would be unaffected, but for new pensions the tax treatment would look more like an Isa - you contribute out of your post-tax income, but any returns would be tax-free.
Such a product - which some have dubbed a "pensions Isa" or "Pisa" - would need to have some carrot to encourage people to take it out.
The Chancellor suggested in his speech that this could be in the form of a Government "top-up" into the fund. There would be some attractions to this - it could be focused on younger people or those with modest savings. By contrast, the current tax relief system overwhelmingly showers its generosity on the highest earners and those who put the most in.
While such a reform might be worthy, it would hardly set the world alight if it only applied to new pension savings.
The much bigger prize would be a reform that affected the millions of people who were already saving into a pension.
My suspicion is that this is what the Chancellor is really interested in, but a Green Paper that specifically talked about taking away tax relief from those who already received it would have created a storm.
The reason this would be so attractive to the Chancellor is that it could bring forward billions of pounds of tax revenue.
Instead of giving tax relief throughout a working life and only gradually receiving tax through the decades of retirement, an Isa treatment would allow the Chancellor to tax income as soon as it is earned, though forgoing taxation in decades to come.
For a Chancellor with a National Debt in excess of £1.5 trillion, this would be well worth exploring.
The biggest prize of all would be to unlock the untaxed wealth in the pension funds of those who have been saving for decades.
For example, if people were able to move their pension pot into a Pisa, repaying most of the tax breaks they had already received, in return for a cash bribe and a promise of no future taxation, the fiscal impact could be dramatic.
Some people say that the Chancellor has already made up his mind what to do, but I am doubtful. In my experience he will be waiting to see who can come up with the best idea for bringing forward the most revenue with the lowest political cost. And if that happens to improve the incentive to save for a pension and cement the Chancellor's reputation as a reformer, then that will be a bonus.
Personally, I would like to see this consultation look much more widely than simply applying Isa-style tax treatment to savings. An overhaul of pensions tax relief is long overdue and there is a strong case for keeping tax relief but making it much simpler and fairer.
A flat rate of tax relief for all - perhaps a 33pc rate so that the Government puts in one pound for every two pounds that you save - would boost the savings of those who have the biggest savings gap and could pave the way for the abolition of the complex Lifetime Allowance and the simplification of the Annual Allowance.
This is a once-in-a-generation chance to reform an area of the welfare state that costs tens of billions of pounds each year, money that is spent in a complex and ineffective way.
I hope that the Chancellor is indeed in the mood for radical and long overdue reform.