Beware: the government could come for your pension assets

You’re a deeply-in-debt government; your deficit is running at 11.8% of GDP. That’s not as bad as it could have been, but, given the national debt is now at its highest since the 1960s, it isn’t exactly good either. You’ve also made a lot of promises – green revolutions, levelling up, and the financing of social care. Your prime minister has promised that no one will have to sell their totemic “family home” to pay for the latter. What do you do?

In an ideal world you’d find a pile of cash that, while technically owned by voters, is mostly inaccessible to them in the short term; that many don’t even know they have; and that is considered to be head-in-sand-style complicated by most of the remainder. In the UK we have just the thing: a huge pile of private pension assets.

So it should be no surprise that talk of raising taxes on those assets is here again. The key risks are to the tax relief you get as you save (you effectively get your income tax on your contributions back); the annual allowance (you can save up to £40,000 a year as long as you earn less than £210,000 – it tapers down to £10,000 after that); and to the lifetime allowance (you can save up to £1,073,000 before you have to pay extra taxes on the excess).

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Fortunes could be made for the state by slashing the tax relief to a low-ish flat rate. But that might be too obvious. Easier to cut the annual allowance to, say, £20,000, or the lifetime allowance to, say, £800,000. Both sound like such big numbers – so it can easily be presented under a popular “tax-the-rich” banner. The result? A government’s dream – a stealth tax that most think is someone else’s problem.

It might not be. Millions of those with good public-sector pensions will find they are already caught up in the allowance system (if you expect a pension of £50,000-a-year-plus, you definitely are). The annual allowance taper also hits more than you think: not many earn £210,000 a year for their whole career, but many hundreds of thousands do at some point during a career. (This can be hard for MPs with their non-fluctuating incomes to grasp, but they must try.)

The key point is that the UK pension system is actually very simple – until you hit an allowance limit. Then it fast becomes a punitive admin hell, one a good government really wouldn’t want to drag its people into by slashing allowances further. Better to do something different: dump the most complicated allowance and cut the limit on the other. Simplicity over stealth. So get rid of the annual allowance, and cut the lifetime allowance to whatever level leaves people with the ability to save enough to live on, along with the state pension (£800,000 seems OK). The rest can be invested outside pension wrappers.

Wrapper or no wrapper, there are plenty of ideas in this week’s issue. We look at ways to catch the post-pandemic bounce in the UK (this is not over, as the bid for Morrisons shows); Max King picks two of his favourite investment trusts; John Stepek looks at how to play the private-equity boom in the UK; and for those who can cope with a little concentration of risk, Michael Taylor picks for four very interesting Aim stocks.

Otherwise, you may note that Jeff Bezos is going into space this summer and that you are not. At this rate you aren’t even going to the south of France. But there is a consolation prize. If you aren’t going to be topping up your pension any more, or paying for hotels abroad, you may have enough left over every month to finance a mortgage on a nice country house with a swimming pool in the UK.

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