Osborne’s choice: Will he still reform pension taxes?

So George Osborne has bottled it. The big reforms to pensions tax relief, first floated in June 2015, have been shelved.

Politicians have all stripes have been tinkering with tax relief at successive budgets for at least a decade.

It is an area that is desperate for reform, even more so since the pension freedoms came into force last April.

And there is general industry and political consensus about how to do it. A flat rate relief for everyone set between 20% and 30% is widely seen as an appropriate measure. Some radicals favour a pensions Isa.

The problem? Tory backbenches didn’t like tax relief levels being cut for middle earners.

Savers in the 40p income tax bracket would naturally have seen their incentives to save reduced and money taken out of their pocket.

And pensions minister Ros Altmann could have resigned if he opted for a pensions Isa. It’s been a bumpy ride in her ministerial car and Altmann may have jumped at the chance to leave on principle.

The Daily Mail was campaigning against a flat rate too and the Telegraph would have also been grumpy. Two crucial readerships of oldies and middle earners.

With the 23 June referendum on the horizon and these constituencies already angry about the Government’s pro-EU position, he has decided against introducing it during this Budget.

It is a sensible political move that keeps the wolves at bay during the crucial referendum period. A referendum he must win.

But has it been postponed or abandoned for good? Osborne’s hero and mentor is Thatcher’s Chancellor Nigel Lawson, the great tax and savings reformer.

Lawson understood the importance of savings and investments to politics in a way that Gordon Brown never did. He was the man who effectively created the IFA in his 1988 budget.

He also slashed the top rate of income tax from 60p to 40p in one fell swoop.
And he reformed pensions. Some argue his contracting-out reforms sparked a wave of misselling that harmed thousands of consumers in the 1990s.

But he is Osborne’s idol. And there is no question that Osborne wants to build on his legacy as a bold pensions reformer.
His freedoms already match Lawson’s changes in their ambition, perhaps even more so. And tax relief is the final area where reform is desperately overdue.
He will want to return to it as soon as practicable.

But he will have to act soon. Lawson once told me the pensions industry is the “most powerful lobby in the land”. Bigger than banks. Bigger than trade unions.

And that is from somebody who should know.

Osborne has given the pensions lobby time to get their campaigns and lobbying into place so it will be harder now. And harder still, the longer he waits.

More importantly, there are other political events on the horizon. A Tory leadership election in 2019 and a general election in 2020.

There is a window to impose controversial reforms but it is narrow. Osborne has an Autumn statement this year then a 2017 budget and 2017 Autumn statement. After that, it is campaign season and it’s too sensitive to push them through.

If Osborne wants to cement his legacy as a great Lawsonian reforming Chancellor then he has to strike soon.

He has already been bruised by his U-turn on tax credit cuts last year. That was abandoned for good, not simply postponed.

Will he cave again? Does he favour his dwindling leadership ambitions over his legacy as Chancellor? Boldness or political expediency? That is the choice he faces.

I expect the delay on tax relief reform to be just that, a short delay. And he’ll come back to it in the autumn.

But whatever he decides will tell us more about Osborne’s character and values than nearly any other decision he makes.

Meanwhile, advisers and savers wait on the political ambition of one man to plan their finances for the next 50 years.

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