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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

Osborne may cut pension allowance to balance books

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. 

9 comments so far. Why not have your say?

sgjhaghsdg

Feb 09, 2016 at 14:52

The previous lot of attacks on personal pensions haven't yet come into force and now more are being mooted. Madness.

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derek farman

Feb 09, 2016 at 15:56

I'm beginning to think Osborne is wearing a reality excluder.

We ordinary folk have been hit quite hard enough already following the banks debacle.

Now he has done a non deal with google over their tax. Heavens, I could have negotiated a better deal myself.

What is he playing at.

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Jon

Feb 09, 2016 at 16:31

If he does this then he is morally obliged to cut all public pensions to a maximum of around £30k pa indexed linked with no lump sum (or proportionately reduced by any lump sum) as this is what a £1m pension pot would buy

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dab

Feb 09, 2016 at 17:44

The lifetime limit of £1m is not a limit on contributions. It is a limit on fund value, which is dependent on investment returns.

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geoffrey mulford

Feb 09, 2016 at 20:27

I am all for cuts. A pension should be there to put bread on the table not to buy yachts. There are still ISA's out there if you want to save for a wonderful retirement. But massive tax breaks so someone can have a retirement that is better than the average person earns seems wrong to me.

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sgjhaghsdg

Feb 09, 2016 at 21:11

Yes, people saving money they work hard for (not DB magic money tree stuff) for their own retirement, without being taxed on it. I'm sure this works the extreme left into conniptions and we all need to work less and claim more benefits. Oh well.

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JohnR

Feb 10, 2016 at 05:55

...and then when they came for me.

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Dr. Meldrew

Feb 13, 2016 at 11:20

Here comes a generation of poverty-stricken pensioners that (i) don't have final-salary pensions and (ii) haven't had motivation to save anything for money-purchase schemes. Until that happens, the proletariat will not save enough and the average pension pot will be less that £100k yielding a pension of less that £4k per year. But why would David & George care? They'll be well gone by the time this kicks in.

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Steve Argent

Feb 15, 2016 at 21:01

But if the marginal rate in is less than 30% then additional pension saving is not economic - assuming that marginal tax rate when pension is being paid is 40% (and accounting for 25% tax free lump sum).

but roll on the budget - how can we decide pension approach with so much tax rate uncertainty.

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