View the article online at http://citywire.co.uk/money/article/a883767
Government could lump savers with £4bn pensions tax raid
Former pensions minister Steve Webb has warned the government could still shift pension taxation to an ISA-style system, removing the tax-free lump sum.
Former minister Steve Webb has warned the tax-free lump sum could come under threat from chancellor George Osborne's reforms to pension taxation.
Writing in the Sunday Times, former pensions minister Webb said a move to ISA-style taxation of pensions could still be on the cards, meaning the £4 billion boost savers receive from the tax-free lump sum could go.
Under the current rules, savers are allowed to withdraw 25% of their pension untaxed when they hit age 55. However, that benefit would be a casualty of a move to an ISA-style system for pensions, where contributions are taxed but growth and income are free of tax.
Osborne announced plans to overhaul pensions tax relief in last year's summer Budget. Recent reports have suggested the government was backing away from an ISA-style system in favour of a flat rate of pension tax relief, which would see relief for higher earners cut.
But Webb said the chancellor's preference remained to move pensions towards ISA-style taxation. ‘I do not believe that the flat rate was ever the Treasury’s first preference,' he said.
'Back in July 2015 when the chancellor published his green paper, the idea of a flat rate was not mentioned at all. Instead, in his Budget speech, Osborne specifically floated an alternative idea, namely making saving for a pension more like saving in an ISA.
‘To the chancellor, the big attraction of the “pensions ISA” is that he suddenly gets a tax windfall. For all of today’s workers who would have been deferring tax on their earnings by putting their money into a pension, the tax has to be paid right now, as soon as it is earned…It is not hard to see why the chancellor floated this idea in the summer and why, I believe, his heart still makes him want to go down this route.’
Webb said cutting the at-retirement tax free lump sum would be ‘an extra tax bombshell’ that 'seems to have gone completely unnoticed’ in discussions of ISA-style tax treatment.
He said: ‘Successive chancellors have looked hard at doing something about the tax-free lump sum. In his 1985 budget speech, Lord Lawson famously referred to the “much-loved but anomalous” tax-free lump sum, ruling out touching it for fear of the political repercussions. But with a pensions ISA, this tax break quietly disappears.’
Webb said while getting rid of the tax free lump sums already built up ‘would be politically toxic’ , Osborne would be able to stop people building up any more tax-free lump sums on future pension savings.
‘Even for someone 10 years away from pension age, this could have a big impact on their retirement planning,’ he said.
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