RUTH SUNDERLAND: Chancellor loses pension fund

Nervousness is palpable in the City ahead of the Budget with apprehensions about possible tax raids by Rachel Reeves on pensions.

As my colleague John-Paul Ford Rojas reported in our sister paper, the Mail on Sunday, the bosses of major pension companies are imploring the Chancellor of the Exchequer not to launch a tax crackdown on those saving for retirement.

In his quest to fleece anyone perceived as even vaguely wealthy, Reeves is considering measures such as reducing the tax-free lump sum and slashing contribution relief for higher earners.

Resorting to measures like these to fill a budget black hole would be the worst kind of folly, particularly as the alleged £22bn deficit is largely a self-inflicted consequence of his own enthusiasm for handing out pay rises to people like train drivers and junior doctors.

Leaving that aside, the suggestion that privileged individuals are taking advantage of the tax system to amass huge personal pension pots is laughable. Cutting the tax allowance on retirement savings to the basic rate of 20% would not just affect an elite group of high earners, but would affect around nine million people on moderately good salaries above £50,000.

More and more employees are being pushed into this 40 per cent bracket by “tax loading” – a backdoor measure introduced by the Conservatives and adopted by Labour, whereby allowances and thresholds are not increased in line with rising prices.

Reeves would present it as an equitable and progressive transfer of power from the privileged to the less privileged, but in reality it would be a direct attack on the British middle class.

It will also seek to reduce the amount that can be taken as a tax-free lump sum from the current limit of £268,275, perhaps to £100,000.

These seem like large sums, but most people who have accumulated them have done so over a lifetime of hard work and have based their retirement plans, perhaps drawn up over many years, on the expectation of receiving this money.

Attacking the lump sum would derail that careful planning and amount to retroactive taxation, which is odious because it penalizes people in arbitrary and unpredictable ways.

The central issue here is trust, the foundation on which the entire pension system is based.

Saving for a pension involves people putting money into a fund that they won’t be able to touch for many years and taking the leap of faith that it will provide them with an income when they need it, decades in the future.

That, as our American friends would say, is a “big ask,” given that immediate demands for cash tend to take priority. Constantly changing regulations undermine trust in the system and make complex decisions even more difficult for individuals.

As things stand, up to seven million people are facing a difficult retirement, which, with the ageing population, will put a huge burden on the public purse. A tax crackdown will only make matters worse.

Automatic enrollment has helped, but most employees still don’t contribute enough. One in five don’t save anything, meaning they’re missing out on free money in the form of employer contributions.

If Reeves is serious about taking positive steps on pensions, then he should consider improving automatic enrolment so that individuals and businesses contribute more.

Other than that, you should keep your hands off our savings.