The government guarantees state pension triple lock will remain at least 'for the rest of this Parliament’, but no commitment on pension tax relief.
The announcement comes in response to a Treasury committee report into household finances that accused the triple lock of being ‘unsustainable’.
The triple lock guarantees that the state pension grows every year by the highest of inflation, growth in earnings or 2.5 per cent. While the committee says that this makes it unsustainable, the government says that it stands by the triple lock as a key lever for lifting many pensioners out of poverty.
It added that since the triple lock was introduced in 2011-12, the average pensioner household has seen its income after housing costs rise by 8.7 per cent above the rate of inflation, with pensioner incomes now at a record level of £307 a week.
While it was clear on its response to the triple lock, less clear was the commitment to pensions tax relief. Much speculation has been made in recent days that the chancellor would cut higher-rate tax relief to raise money for extra funding of the NHS.
In its response the government states: ‘The government is aware that any changes to the pensions tax relief regime could have significant impacts for pension schemes, employers and individuals.
‘While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since consultation in 2015.’
Responding to this, Nicky Morgan MP, chair of the Treasury Committee, comments: ‘Tax relief on pensions is not an effective or well-targeted way of incentivising saving, and the committee encouraged the government to consider replacing the lifetime allowance with a lower annual allowance.
‘Following reports that the chancellor is considering a range of options for reforming pension tax relief in the Budget, the committee will keep a close watch on any announcements.’
But Tom Selby senior analyst at AJ Bell says: ‘Ripping the roots from the pension tax system just as automatic enrolment is bedding in would have been a monumental gamble by Spreadsheet Phil.
‘Fundamental reform as some have suggested – such as introducing a flat-rate of tax relief – would hit right into Conservative heartlands and risk causing a rebellion among backbench MPs already riled by the Brexit negotiations.’
Lifetime Isas cling on
The committee also criticised the much-maligned Lifetime Isa (Lisa). This savings product was introduced to offer a boost to under-40s saving either towards their first homes or retirement. However, if the money is used for anything else, considerable penalties are imposed. Morgan says: ‘The committee also expressed concern about the complexity and perverse incentives of the Lifetime Isa.
‘It is disappointing, therefore, that the government ignored the committee’s call for the Lifetime Isa to be abolished, and will press on without reform.’
In its response the government says: ‘The government remains committed to supporting savers of all income levels and at all stages of life for a range of aims, such as saving towards the purchase of a first home, for a rainy day, or for retirement.
‘The Lifetime Isa forms a key part of this support and the government is encouraged that many savers are participating and benefitting from the bonus which the government pays out to support the next generation in the habit of saving.’
Finally, Selby adds: ‘The government is right to knock back calls for the Lifetime Isa to be scrapped altogether. Criticisms of the new savings vehicle didn’t appear to be based on any hard evidence.
‘In fact, the Lisa has proven popular among younger savers and ditching it now – just as it gains traction in the UK – would have been a retrograde step.’
This article was originally written by our sister publication Moneywise.