I am 56 this morning. I mention the fact for a reason. Whether I like it or not, George Osborne wrote his budget for me, and millions of others who are my age, and older. Whilst I have no desire to ever retire, if I get the chance, the fact is that the government's new pension plans are designed to give my generation the greatest opportunity for tax abuse that they have ever enjoyed. Let me offer a simple example using these new rules.
Take a man of my age who is a 40% taxpayer (and yes; I am). Now suppose they decide to put £10,000 into a pension when these new rules come into effect. The actual cost to them of doing so is £8,000: tax relief of 20% is given at source, meaning that whilst £10,000 is credited to the account they only have to write a cheque for £8,000 to achieve this result. In addition, they can put this pension contribution on their tax return and claim an additional £2000 of tax relief. A person paying the standard 20% tax rate can't do that: we have a tax system that, perversely, and unjustly, rewards the pension savings of those who are already better off.
Now suppose that this person who has made his contribution then decides to declare that they have retired. Admittedly, it looks under the new rules that they might have to wait until 60 to do this, but that's not long. This does not mean that they have to stop working. It does also not mean that they have to say that they have retired for all their pension arrangements. They can do it with regard to just this one contribution that they have made and put into a separate retirement policy. So, with regard to this policy, which has been safely invested in cash in the meantime, they can now do a number of things.
First they can take 25% of the value of the policy back, tax-free. For the sake of this exercise I'm going to presume that the interest earned on the policy in the year or so that it may have been invested covers the policy costs: it might not, but is not an unfair assumption. So, on a policy that cost them £6,000 after tax relief they now get £2,500 back, tax-free.
Second, they now decide to take the rest of the policy as a lump sum. Because they are still earning they are still a higher rate taxpayer so tax at 40% will be paid on this: That is £3,000, giving them an immediate return of £4,500.
Note the obvious point: they paid out £6,000 and have now got £7,000 back in cash, and that's before taking into account the fact that the money will have been invested tax free in the meantime Even if there were some policy costs for setting up the arrangement what is glaringly obvious is that George Osborne has now set up the equivalent of a cashpoint machine for those over the age of 55 and it will be dispensing money for free, and for those over 60, almost instantly.
If, suppose, instead of doing the above, the person making the contribution knew they were going to retire soon, and knew that they would then have an income which would then be subject to tax at only 20%. In this case the arrangement gets even better for them. Now they would only pay £1,500 in tax on withdrawing the lump sum, and will get £6,000 back from it plus £2,500 in a tax free lump sum. Now what was, in effect, a £6,000 pension contribution is turned into an almost guaranteed return of £8,500 in no time at all, entirely at cost to the taxpayer. Frankly, in that case, ratcheting up the contribution to the maximum possible makes complete sense, even if it's done at maximum cost to society.
All over the country I can sense that there are financial services advisers rubbing their hands in glee, and already writing their sales pitches to exploit this opportunity to make tax-free money on behalf of people of my age.
There was a reason why we had a 55% tax rate on pension withdrawals: it was to prevent this type of abuse. That is now being scrapped. The floodgates for abuse will be opened, and, I guarantee, that abuse will happen.
That, though, will not be without consequence. Once governments realise their folly when making such policy changes they tend to have panic reactions. In this case, I suspect, the whole future of pension tax relief will then be brought into doubt. I should not, of course, complain: I recently proposed doing just that. I do, however, think that such a reform is now much closer than anyone could have expected, precisely because this current policy change from George Osborne will come, in due course, to be seen as ill-advised as Gordon Brown's abolition of the 10p tax rate and his 0% corporation tax rate.
All chancellors are at least as much remembered for their mistakes as they are for anything positive that they did: George Osborne has just made his biggest error.