View the article online at http://citywire.co.uk/money/article/a892096
Osborne launches 'stealth' pension tax relief reform
Pension experts believe the chancellor is pushing through tax relief changes through the 'back door' with the new Lifetime ISA.
Chancellor George Osborne's creation of the Lifetime ISA represents a 'stealth' measure to reform tax relief on pension contributions, according to experts.
Before the Budget Osborne was expected to overhaul the system of tax relief on pension contributions, which is expensive and seen as benefiting the better off.
Reports suggested he favoured either a flat-rate of tax relief or a system which taxed contributions like ISAs, so that savers receive relief when they make a withdrawal rather than when they make the contribution.
Although Osborne did not announce any changes to pension tax relief in the Budget, experts said the introduction of a Lifetime ISA in the Budget was nonetheless a move to change the system.
The new ISA will be available to people under 40 from April 2017. For every £4 saved into a Lifetime ISA, the government will add £1.
Martin Tilley, director of technical services at Dentons, a provider of self-invested personal pesnions (Sipps), said the chancellor saw Lifetime ISAs as a ‘stealth’ measure to introduce tax relief reform.
'It's a stealth introduction, which may be phased in over time, of Pensions ISA,’ he said.
'It's all very well the chancellor saying there will be no big changes to pension tax relief at the moment, but I think actually he's slipped in through the back door a means of introducing it at a later date, without as much of a fanfare.'
Darren Philip, director at B&CE, a workplace pension provider, agreed the policy represented the introduction of Pension ISAs ‘by the back door’.
'Obviously the government had to shy away from its wider tax relief reform for whatever reason, but I think that will very much still be on the agenda, and it will be revisited,' he said.
Former pensions minister Steve Webb described the Lifetime ISA as a ‘Trojan Horse’ for pension tax relief changes.
Webb, who is now director of policy at Royal London, the mutual pension and investments group, said he was still concerned that people would not trust future governments not to tax withdrawals.
'It could be a Trojan Horse for the Pensions ISA. If it was it would be subject to all the problems in thirty years' time of trusting chancellors to honour the promise,’ he said.
Pushed into pensions
Tilley said the Lifetime ISA could become part of the pension regime, falling under the £40,000 annual allowance for pension contributions.
‘Your annual allowance for pensions will be £40,000, but you have to deduct from it any payment you make into your Lifetime ISA. It could be the beginning of the end of the current regime as we know it, albeit something that takes place over the next 30 to 40 years,' he said.
Claire Trott, director at Sipp provider Talbot and Muir, pointed out people who wanted to withdraw savings before they turned 60 faced a large exit penalty.
'You can use the funds at any time to buy your first home, however if you want to withdraw the funds at any time before you're 60, the government will reclaim their bonus, and there's a 5% charge as well, including any growth,' she said.
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