Do you still dry your washing with a traditional iron mangle in the back garden?
Of course not!
In these days of spin dryers, granny’s mangle has been painted bright green and is now in the local antique shop, or is part of the garden furniture at the village inn.
In other words, things change as the decades pass. This is also true in the financial world, as we learned in this year’s Budget 2015, announced on Wednesday, July 8.
The Budget included a bit of a pensions shocker this year, especially for those at the beginning of their working career who may have 40 or more years to go, before they take their pension savings.
The government has announced a green paper – in other words, a proposal – to scrap the tax relief currently paid on pension contributions, and replace it with totally tax-free withdrawals when we retire.
Until now, if you’re a basic rate taxpayer, then of every £100 that goes in, £80 comes from you, and the rest is tax relief of £20.
Under the new proposals, only your £80 would go in here, and you lose the government ‘top-up’ of £20.
The promise of totally tax-free withdrawals at the other end would replace today’s system, where currently only your 25% lump sum withdrawal is tax-free, and any further withdrawals are subject to tax.
So when you think about it, what the government is doing is proposing a system that will give them an immediate saving of £48bn (which is what they paid out in pensions tax relief in 2013-14.)
This was, in fact, identified as something they might propose when this year’s new pension freedoms came in on April 6th. By giving savers the right to do what they like with their ‘pension pot’, to use it as a legacy for their grandchildren, for example, the compulsory requirement to use it to fund your old age was removed.
Industry insiders quickly identified this as a ‘deal breaker’ which would enable the Chancellor, George Osborne, to say “ok, the deal was that you get tax relief on what you save to fund your own retirement. Now that you are no longer required to use the money for that purpose, the deal is broken - and so we are perfectly entitled to scrap the tax relief on your contributions.”
As for the promise of tax-free withdrawals when you retire, well, to use a maritime image, there’s weevils in the ship’s biscuits there too, Cap’n.
This is why I gave particular mention to younger savers earlier.
What George may be doing is telling them: ‘Take a look at this mangle. Great new idea for drying your clothes. Look at this solid iron construction – this mangle will last you 40 years.”
But wait! George Osborne isn’t going to be living in Downing Street in 40 or so years, to ensure that his promise of tax-free withdrawals is still intact! What happens if some other Chancellor, who might not even be born yet, decides it wasn’t such a good idea, after all?
These proposals will certainly require a leap of faith from younger savers, that the promises they’re getting today will still be in place when they retire.
It’s a difficult one. What if some future Chancellor comes up with the idea for the spin dryer, and George’s (tax-free) mangle becomes a painted relic from a bygone era?
This article does not constitute financial advice. Brian Kennedy is a chartered independent financial adviser within Priory Financial Planning Ltd., and can be contacted on 028 9042 5025 or email@example.com. Priory Financial Planning Ltd is an Appointed Representative of TenetConnect Ltd which is authorised and regulated by the Financial Conduct Authority (FCA)