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Osborne may cut pension allowance to balance books
The chancellor could reduce the amount of money people are allowed to save into their pension as he seeks to run a budget surplus.
by Charles Walmsley on Feb 09, 2016 at 09:30
Chancellor George Osborne could reduce the amount of money people are allowed to save into their pension as he seeks to balance the government's books by 2020, according to economists.
Last March, Osborne cut the limit on lifetime contributions an individual can put into their pension pot from £1.25 million to £1 million. That followed a previous cut in the 2012 Autumn Statement from £1.5 million and a reduction in the amount people are allowed to save into their pension each year, from £50,000 to £40,000.
Earlier this year pension experts warned Osborne not to reduce these limits any further after the Daily Mail reported the government was considering reduced the annual allowance to between £10,000 and £20,000.
However as part of its green budget report, the Institute for Fiscal Studies (IFS) said the chancellor’s plans to run a budget surplus by 2019-2020 could be hit by falls in the global economy and as a result he may have to raise taxes elsewhere.
Paul Johnson (pictured), director of the IFS, said: ‘Osborne’s new fiscal charter is much more constraining than his previous fiscal rules. Uncertainty in the fiscal forecasts means that he may well have to cut spending further or raise taxes to get to surplus in 2019–20.’
According to the IFS further cuts to the annual allowance would boost tax revenues in short term.
‘By reducing the amount that individuals can contribute tax-free to a pension, the reforms would tend to increase the amount of income that would immediately be liable for income tax,’ it said.
‘This would boost tax revenues in the near term.’
It pointed out the most recent cut in the lifetime allowance from £1.25 million to £1 million was expected to bring in £600 million in the tax year 2019-2020.
‘Further reductions of the same size would raise significantly more than that because far more people would be affected,’ it said.
The IFS also pointed out this might not be a long-term measure to reduce the deficit. ‘This would come at the expense of some future tax revenues, since future pension payments would be expected to be lower and thus less tax would be payable,’ it said.
Osborne will announce his Budget on 16 March. He is expected to reveal significant changes to the way pension contributions are taxed with a flat rate of relief on tax favoured.
The same report suggested these proposals would have an 'uncertain' impact on public finances as higher earners would look to contribute before rules were introduced, and Budget forecasts would not extend beyond 2020-2021.
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