Intergenerational battle waged over old age cash

Few things fuel ill feeling between generations as much as money, especially the money we’ll receive in old age – how it is raised, who gets how much and when.

Baby boomers believe they fully deserve the ultra-generous state pension triple lock – the infamous promise to increase the state pension by whichever is the greater between average wage growth, inflation or an arbitrary 2.5 per cent.

Nobody else can work out how on earth the government can afford to keep that promise long term. They assume they won’t retire soon enough to benefit from it, and believe the policy is yet another barely concealed case of robbing the future to pay for the present.

Experts have been speculating that the next Budget – the next fiscal update – would be the one in which defeat would be conceded, the one that would herald the return to common sense and the end of the triple lock system. So far it hasn’t happened.

Then there’s the other rule on perpetually shaky ground – higher rate pension tax relief.

That’s the tax break – effectively a savings bonus added to your pension pot by the government – that allows higher earners paying higher rates of tax to also get higher rates of tax relief on their private pensions savings.

The rough rule of thumb is that you get the same rate of tax relief back on your pension savings as you pay on your income.

Basic rate payers, paying 20 per cent tax on their earnings, get 20 per cent back while higher and additional rate payers get 40 to 45 per cent back. The bands are very slightly different in Scotland.

Along with some fairly epic overhauls such as automatic enrolment, it has been pretty effective at getting those generations at the height of their earning potential to stash as much cash away for old age as they can, especially if they only just fall into the higher tax rate brackets. In which case, they potentially gain far more in pension tax relief than they relinquish in income tax.

In other words, if you play it right, it’s a massive long-term savings win for the working age adult. And as such, it’s also ripe for the chop.

Much like the triple lock, guessing the expiry date of higher-rate pension tax relief has been a favourite game of many a pensions specialist for several years now.

In a way, then, the latest noise about changes, or not, to state funding old age income isn’t anything new.

But the fear of eking out our later years without enough to do more than survive is not a game.

The government now has a series of choices to make if it is really so concerned about plugging gaps in its coffers that it is willing to raid the lifelong savings of its population.

You might expect that it would either scrap the triple lock and acknowledge that its unwavering financial bolstering of the older generations has been an extraordinarily expensive error, or ditch the generous higher rate relief for the younger ones.

It seems, if this week’s headlines are anything to go by, that plans are afoot to use the autumn Budget to kick the younger, working age generations in the teeth by keeping the former, ditching the latter and aiming a few extra blows while it’s at it.

It isn’t going down well.

Steven Cameron, pensions director at Aegon, calls it an intergenerational double whammy.

“Once again the prospect of reforming pension tax relief for higher earners is being floated as a means to restore holes in the government’s finances. What’s different this time is that the state pension triple lock is also firmly in the spotlight with recent earnings anomalies likely to grant current state pensioners a bumper increase next April,” he says.

“Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness.”

Tom Selby, senior analyst at AJ Bell, adds: “Introducing a flat-rate of pension tax relief, an idea often touted by think tanks, would present genuine practical challenges and would likely result in tax rises for public sector workers in defined benefit schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic.”

This week’s speculation also highlighted the possibility of a further cut to the pensions lifetime allowance. Given this was frozen at the recent Budget, any further change would be particularly punitive, Cameron warns.

The current allowance only buys an annual guaranteed income of around £1,700 a month, which isn’t exactly going to fund a luxury lifestyle.

“The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the government increased their pension costs just as many attempt to recover from a nightmare year.

“More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, inadequate retirement saving remains one of the most significant long-term challenges,” warns Selby.

“Any further reforms – and in particular cuts in pension tax relief – need to be mindful of the impact on savings incentives over decades.”