Now the tax raising Blob is coming for your pension

State and public sector pensions are becoming unaffordable, and are threatening to undermine the public finances. We will have to accept at some point that the triple lock must go and the pension age will have to rise at a faster rate than the government currently intends. But why attack private pensions – those accrued by people who have made their own provision for their retirement and threaten no burden on the taxpayer?

The Institute for Fiscal Studies (IFS) has published a report suggesting that the government should cap the tax-free lump sum which pensioners are currently entitled to take out of their accrued pots after the age of 55. It argues that this arrangement favours higher-rate taxpayers, and offers nothing to pensioners whose income is too low to be liable for income tax.

Perhaps this is true, but there is a fundamental issue of fairness and trust involved. Many of the people who would be affected by such a move have spent decades paying into pension funds, understanding that they would be allowed to take out a tax-free lump sum on retirement. Some will have mortgages which they need to pay off using the money. They have tied up their funds for many years, unable to access them until middle age. With most tax rises, we are at least given a chance to change our behaviour before the change takes effect; not in this case. Had we known we would be taxed on retirement, we might have done something more exciting with the money, rather than put up with low returns from a pension fund. What the IFS is proposing is retrospective taxation plain and simple – a very poor practice which compromises the public consent on which all taxation systems are founded.

I know the IFS is a politically neutral think tank. It is not obviously politically partisan. Yet it is very noticeable that its report focuses on private pensions. Forgive me if, somewhere in the annals of the IFS’s publications, there is a report which recommends rewriting the rules of public sector pensions mid-career, so that people who were led to believe they would receive a pension worth, say, two thirds of their final salary should instead be paid only half their final salary. But I certainly can’t remember the IFS making such a proposal, and I don’t think it would dare. 

It is not that I don’t have sympathy with the idea of reforming taxation of pensions. Personally, I think future pensions should be treated like Individual Savings Accounts (ISAs), where you receive no tax relief on your contributions but you then pay no tax on what you take out. It is far simpler than the arrangement we have with pensions at the moment, where the government throws money into our pension funds when we are making contributions but then tries to claw it back through the punitive 55 percent tax on funds when they become worth just over a million pounds. That has had all kinds of perverse effects, such as persuading people to abandon the workplace early so as to avoid an enormous bill. Some of the NHS’ problems can be traced to doctors retiring early for that very reason.

But the state shouldn’t change the rules midway through someone’s career. To be fair to the Government, it hasn’t proposed doing such a thing. It should make it clear to pensioners and the IFS that it will not be doing so.