Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a887355

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.

 
Chancellor drops pension tax changes from Budget

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.’

U-turn welcomed

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.’

10 comments so far. Why not have your say?

Gleaner

Mar 07, 2016 at 17:26

So if I read this right, the previous speculation on what the Chancellor may do on pensions in the forthcoming budget is now subject to a U turn.

Even though he did not announce it in the first place nor deny it in the second.

This whole article seems to be a prime example of lobbying via a blog.

As to what the Chancellor may or may not do, no doubt he will tell us in the Budget.

report this

hooligan

Mar 07, 2016 at 18:03

you are one smart cookie, gleaner! i think it's mostly free advertising and job security for that Royal London individual too.

report this

Broomtree

Mar 07, 2016 at 18:15

Speculation and unhelpful leaked rumours are messing with people's lives; some of us are close to retirement and attempting to make once in a lifetime choices all this scare mongering is quite frankly a disgrace - I was even looking at taking my 25% early 'just in case' until I realised the gossip didn't make any sense

report this

ANF

Mar 07, 2016 at 18:35

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.'

Key end of sentence was missed out, at least in the version I am reading. Can you enlighten us please?

report this

hooligan

Mar 07, 2016 at 19:00

are you referring to this comment from McPhail in an article today?

http://www.yourmoney.com/retirement/no-changes-to-pension-tax-relief-for-now/

i think you need to ask him to explain his opinion and his contact at the treasury who said to this to him.

I read his comment as an opinion that the chancellor needs to raise a whole bunch of taxes to pay for ongoing and very sticky fiscal deficits and that this was an option.

it may very well be that the treasury only sees its role as inflcting the amount of pain that will lose the least votes and slow down economic activity by the least.

for me, a net cut of around 20% across the board in all spending is the only fiscal solution that will put britain on the right track within 5 years, via economic warfare.

if we don't we are doomed to follow japan and greece right into third world status. we need to lead not follow.

report this

Ian Lees

Mar 07, 2016 at 21:25

How much has this Pension changes cost in Financial Terms and Angst ? Osborne and the CONservative Party create uncertainty - for the next 30 Years - due to their reckless and gay abandonment - and Gross Negligence. Businesses have been destroyed - tens of thousands of Advisers have left the industry - and now they are gong to use Employers and Apprentices. Perhaps the voting public will vote ina an apprentice MP because this lot are far too expensive corrupt and incompetent.

report this

john west 10

Mar 08, 2016 at 01:26

What about the Frozen Pensioners and it is a scandel and so barbaric and totally discriminatory. Yemember the slogan " We work for you and this Government will stand no discrimination. REALLY!!!!

report this

john west 10

Mar 08, 2016 at 01:29

Sorry not Remember but remember, but the other oosters would have got it, unlike our so called public servants, but lets face it they do not care about anyone, but themselves and their pockets and bank accounts.

report this

andy

Mar 08, 2016 at 08:12

hooligan

At times like this I am reminded of the French Finance Minister Jean-Baptiste Colbert (1619 - 1683) who is reported to have said ""The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing."

report this

hooligan

Mar 08, 2016 at 11:16

Andy,

I woke up at stupid o’clock here in Chicago (bad burger!) so I have concocted the somewhat lengthy monologue that capture some of my thoughts on the broader UK fiscal position. Yes, that Colbert was a sophistikat! Taxation is an art form that compares with a sort of a live an interactive Venus fly trap, spitting out a fly with the greatest remaining wing size for it to actually fly away!

That train of thought led me to ponder past forecast errors by the Treasury in each of its budgets since the year following the financial crisis. These have had a significant impact on the continued parlous state of the UK government’s fiscal position.

I have pasted a link below from the Office of Budget Responsibility (OBR) that had some highlights for me in its first few pages.

There was a £60 billion error in tax receipts from earlier 2010 forecasts for 2014/2015. The reasons for taxation shortfalls in 2015 at point 1.9 on page 5.

The main reasons for the errors from the 2010 forecast include a significant one and one, I would argue, was perfectly predictable. This is the shortfall in corporate tax receipts from, guess who, THE BANKS, who are still carrying forward losses from the financial crisis. This tax relief on carried forward losses represents a persistent impact and a continuing and egregious transfer of wealth from the tax payer to the banks.

Another reason for the shortfall was the lower than expected receipt of taxes from North Sea oil. (£8B was received instead of an incredibly optimistic £40B forecast and that was when oil is tracking closer to $100 a barrel than the current $40).

Back to forecast errors, a mere 1% error in fiscal receipts causes a large error in the fiscal deficit. The UK spends more than three quarters of a trillion pounds every year on what looks like "tough to cut" spending. (Each 1% is of tax receipts is £8 billion).

Here’s a nice page to illustrate a summary of the UK fiscal position.

http://www.ukpublicspending.co.uk/government_expenditure.html

The government received "only” £660 billion in tax receipts. A 1% error in combined receipts and spending is worth £14 billion.

Here is that link to the OBR paper (apologies for the long google infected address to get to the source of this OBR paper from October 2015 (cut and paste should cover it!)

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0ahUKEwiLm5OJ8LDLAhWpsYMKHRVvCKAQFggzMAQ&url=https%3A%2F%2Fwww.gov.uk%2Fgovernment%2Fuploads%2Fsystem%2Fuploads%2Fattachment_data%2Ffile%2F467272%2F51556_OBR_FER_Web.pdf&usg=AFQjCNENETrbuYnLL39U62jwkOceB0gZoQ&bvm=bv.116274245,d.amc

http://www.taxresearch.org.uk/Blog/2014/05/27/ukip-tax-and-the-200-billion-hole-in-its-budget-for-which-farage-has-to-supply-answers/

To finish on a slightly sour note, the size of the Government sector continues to approach that of a communist state in terms of its dominance of economic activity. The government is responsible for 38% of spending in the UK economy (£760B of spending -and £660B of taxes – compared to Expenditure based GDP – not Income or Output based - of £2,000 B). Net government debt is shown in the UK public spending link at 80% of GDP or £1.6 trillion. A return to an interest rate of, say 5%, with a Net Debt of that figure means that interest along would cost £80 billion a year – close to the entire amount spent on education at the moment!

My view is that it is a scandal to run annual fiscal deficits of 5% of GDP (£100B divided by £2,000B). Government spending needs to fall by 20% to around £650B (like the Irish did), the effects need to be adjusted for second round impacts on revenue in order to reduce accumulated Government debt by around 5% per annum for 8 -10 years until it falls to around 40%of GDP. That means running a fiscal surplus now and not persistent fiscal deficits.

Once government debt is back to “Thatcheresque” levels of 30-40% of GDP we will be released from this slow slide into communism and an absolute zero of personal, corporate and Government spending. Government debt can return to a symmetrical debt instrument that is actually repaid, rather than some Bernie Madoff “Ponzi “scheme for successive politicians with zero accountability, where the size of the Government debt grows (in the words of Buzz Lightyear) "to infinity and beyond".

In my view, an economy can only grow by the amount of interest paid on loans (public or private) plus retained corporate cash flow profits. With the government now paying no interest (yes, I know the government is us!) this source of economic growth has vanished and is supported by the criminal fraternity masquerading as central bankers. The "grand monetary experiment" can only impoverish entire nations by subjecting them to “death by a thousand cuts”!

Back to my hangover! But at least I wrote the first draft of this 770 word missive, drunk and revised it (more) sober, as Ernest Hemmingway didn’t famously say!

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

A comprehensive approach to investing in Europe


Making the most out of Europe’s potential means seeing things differently. Learn more about how BlackRock’s focused approach to investing in Europe helps investors unlock the continent’s vast potential.

Watch Now

The Citywire Guide to Investment Trusts


In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

Investment Trust Watch: my Scottish tip for 2017

by Gavin Lumsden on Dec 09, 2016 at 16:10

Sorry, this link is not
quite ready yet