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Chancellor drops pension tax changes from Budget
Chancellor George Osborne has abandoned plans to reform pension tax in next week's Budget but experts say it's a stay of execution.
Update: Pension experts have welcomed the chancellor’s decision to not make any radical changes to pension tax relief in this year’s Budget, but the months of speculation are expected to have cost the government £1.5 billion.
Last week it was reported the chancellor, George Osborne, was in favour of overhauling pension tax relief to create an ISA-style system.
However, on Friday night it was reported he had reversed his thinking. ‘George has always been clear he wouldn’t do anything to damage saving,’ a source close to the chancellor told The Times.
‘He’s listened to what people have said and concluded that now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head.
‘It is also clear that employers wouldn’t welcome a wholesale change in the way they administer schemes. So he is not going to tear up the system of pension tax relief. There won’t be any changes to tax relief at all in the Budget.’
Experts have widely welcomed the news. Former pensions minister Steve Webb, director of policy and external communications at Royal London, said major reforms would have been ‘totally unacceptable.’
‘Making major reforms simply to fill a short-term hole in the chancellor’s Budget would have been totally unacceptable,’ he said.
‘After nearly a year of uncertainty what savers need more than anything is a period of stability. The chancellor should now rule out any changes in tax relief at least for the rest of this parliament.’
Huw Evans, director general of the Association of British Insurers (ABI), said that the chancellor’s U-turn was a ‘sensible decision.’
‘Although we argued for a savers’ bonus flat-rate reform, the current system works well with auto-enrolment and delivers valuable incentives to save for retirement. We now need a period of stability to ensure confidence can grow and the benefits of auto-enrolment can be realised.’
Osborne announced a possible radical shake up of pensions tax relief in his Summer Budget in 2015, floating a possible move to an ISA-style system where income would be tax free but tax relief on contributions wold be lost. Other options discussed included a flat-rate of relief that would see higher rate relief cut.
But online stock broker AJ Bell said if the Treasury’s plan was to save money spent each year on pensions tax relief, then it had 'back fired spectacularly’ as people made even bigger contributions.
Andy Bell, chief executive of AJ Bell, said: ‘Far from saving money, the uncertainty created by the consultation and scare stories from former ministers has led to a surge in pension contributions and there will be a heavy cost to this for the Treasury.’
It estimated the Treasury could have lost an extra £1.5 billion.
Not safe yet
However, the threat of political tinkering around pensions has not abated completely and Richard Parkin, head of pensions at Fidelity International, said he expected that ‘this is action postponed rather than action abandoned’.
He added that while pension-ISAs had been ‘universally rejected as too disruptive’ and a flat-rate system would create losers, the current system was ‘not well understood' and would need to be changed.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the U-turn on tax relief did not mean that pensions would be left alone in the Budget next week.
‘Given that the need to raise money hasn’t gone away, pensions must ,’ he said.
Instead of reducing tax relief, Osborne could turn the knife to other pension benefits.
Savers may find the amount they can put into a pension each year, £40,000, and the amount they are allowed to hold over their lifetime, £1 million, could be restricted once again.
‘For many people a sum of £40,000 a year looks more like an annual salary than a pension contribution, however for higher earners, those who have left their pension funding until late in their careers and for older members of final salary pension schemes, this is already an uncomfortably low ceiling. That might not stop the chancellor from bringing it lower though,’ said McPhail.
He added that the pension industry had called for the government to scrap the lifetime allowance completely but ‘the Treasury has found this a useful mechanism for progressively .
Last year the chancellor announced a taper on the amount higher earners could save into a pension. The annual allowance is reduced by £1 for every £2 over £150,000 earned, down to a floor of £10,000 for those earning £210,000.
McPhail said this taper could be extended and the thresholds brought down to bring more people into the taper.
Alternatively, a potentially lucrative but unpopular change could be made to salary sacrifice. This involves workers giving up some of their income for pension contributions from their employer in order to save national insurance.
‘The national insurance exemption on pension contributions costs the Exchequer around £15 billion a year,’ said McPhail. ‘This may well prove a very tempting target, however it would and would cause substantial administrative upheaval for payroll managers.’
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