Few things fuel intergenerational discomfort as much as money, especially the money we will receive in old age – how it is collected, who gets how much, and when.
Baby boomers believe they fully deserve the ultra-generous triple lock of state pensions – the infamous promise to raise state pensions by the higher of the two average wage growth, l inflation or an arbitrary amount of 2.5 percent.
No one else can understand how the government can afford to keep this long term promise. They assume they won’t be retiring early enough to benefit, and believe politics is yet another barely hidden case of stealing the future to pay for the present.
Experts have speculated that the next budget – the next fiscal update – will be one in which defeat is conceded, one that heralds the return to common sense and the end of the triple lockdown system. So far, this has not happened.
Then there is the other rule on perpetually volatile ground – higher rate pension tax relief.
This is the tax break – actually a savings bonus added to your retirement fund by the government – that allows high incomes paying higher tax rates to get higher tax rates as well. higher tax relief on their private retirement savings.
As a rule, you benefit from the same rate of tax relief on your pension savings as on your income.
Basic rate taxpayers, who pay 20 percent tax on their income, recover 20 percent, while higher and additional rate taxpayers receive 40 to 45 percent. The groups are very slightly different in Scotland.
Along with some pretty epic redesigns such as auto-enrollment, it’s been pretty effective in enabling those generations at the peak of their potential to make as much old age money as possible, especially if they’re just falling into the doldrums. higher tax. rate bands. In this case, they potentially earn much more in pension tax relief than they waive in income tax.
In other words, if you play well, that’s a massive long-term savings for the working-age adult. And as such, it’s also ripe for the chop.
Much like the triple lock, guessing when the higher rate pension tax break will expire has been a favorite game of many pensioners for several years now.
In a way, then, the latest rumor about whether or not public funding of old age income is changing is nothing new.
But the fear of going through our last years without having enough to do more than survive is no game.
The government now has a series of choices to make if it is truly so concerned about filling gaps in its coffers that it is prepared to plunder the lifelong savings of its people.
You might expect him to remove the triple lock and recognize that his steadfast financial support for older generations has been an extremely costly mistake, or to abandon the generous relief in higher rates for the younger ones.
It seems, based on the headlines this week, that the fall budget is being considered to kick-start the younger working-age generations by keeping the former, by dropping the seconds and aiming for a few more shots while he’s at it.
It is not going well.
Steven Cameron, director of pensions at Aegon, calls it an intergenerational double whammy.
“Once again, the prospect of reforming tax breaks for high income pensions is being launched as a way to fill the gaps in government finances. What’s different this time is that the triple lock on state pensions is also in the spotlight with recent income anomalies likely to grant current state retirees an exceptional raise next April. “, did he declare.
“Reducing the incentive to save for many high earners while increasing the state pension could end up stoking intergenerational tensions and raise questions of equity.”
Tom Selby, Senior Analyst at AJ Bell, adds: “The introduction of a lump-sum pension tax break, an idea often touted by think tanks, would present real practical challenges and likely result in tax increases for pensioners. public sector workers in defined benefit plans. , including many NHS staff who have been rightly hailed as heroes during the pandemic. “
This week’s speculation also highlighted the possibility of a further reduction in the lifetime pension benefit. Since this was frozen in the recent budget, any further changes would be particularly punitive, Cameron warns.
The current allowance only buys a guaranteed annual income of around £ 1,700 per month, which won’t exactly fund a luxury lifestyle.
“The lifetime allowance has already been wiped out, while employers would likely be furious if the government increased their pension costs just as many are trying to recover from a nightmarish year.
“More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, insufficient retirement savings remains one of the biggest long-term challenges,” warns Selby.
“Any further reform – and especially reductions in pension tax breaks – must take into account the impact on incentives to save over decades. “