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Osborne faces calls for pension tax overhaul

by William Robins on Nov 26, 2012 at 08:33

Osborne faces calls for pension tax overhaul

Chancellor George Osborne should use the upcoming Autumn Statement to introduce sweeping reforms to the pension tax relief regime, the Centre for Policy Studies has urged.

The think tank has called on Osborne to make a series of dramatic changes, including combining the contribution limits for ISAs and tax-relieved pensions, and capping it at between £30,000 and £40,000. Osborne is due to deliver the Autumn Statement on 5 December.

In a paper written by independent pensions expert Michael Johnson, the think tank also called on the government to replace the 25% tax-free lump with a 5% top up of pension pot assets, paid prior to annuitisation.

Johnson argued the abolition of higher-rate pensions tax relief would pay for the ISA subscription cap to be raised from the current £11,280 to £30,000 or £40,000. He said the move would put pressure on pension providers.

‘The pensions industry would then need to refocus on delivering high quality asset management of (long-term) savings, the word “pension” having been consigned to history,’ he said.

Tom McPhail, Hargreaves Lansdown head of pensions research, said he was in favour of linking ISAs and pensions but not of increasing the ISA allowance if it negatively impacted pensions.

‘Increasing the amount that can be put in an ISA makes it easier to put money away, but not for retirement purposes, and there would be a risk the money would not be there when people needed it,’ he said.


Johnson (pictured above) supported his call to scrap the lump sum with research from provider Prudential which showed 10% of those who had taken the lump sum regretted doing so.

‘People are increasingly questioning the wisdom of having taken the lump sum and spending it, perhaps frivolously, not appreciating at the time the corrosive impact that this would have on their retirement income,’ he said.

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42 comments so far. Why not have your say?

Harriet Marlow

Nov 26, 2012 at 08:45

Remind me why I bothered passing R04 earlier this month?

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Nov 26, 2012 at 08:49

So the current ISA subscription cap is £10,500? Does nobody double check before printing these articles?

"Research showed that 10% of those who took the lump sum regretted doing so" - meaning 90% did not regret it. Why is this a reason to consider scrapping the lump sum benefit?

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Stephen Samosa via mobile

Nov 26, 2012 at 09:01

What a great way to encourage pension saving!

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Nov 26, 2012 at 09:03

@Solomon spot on!..... so 90% want their tax free cash and some idiot considers aboloshing it. Who do these people think they are?

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Nov 26, 2012 at 09:08

Many people will be dismayed by yet another change to pension rules.

Of course there will be need for complicated transition rules for those who had a specific plan for the PCLS. e.g. clear debts.

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Keith Cobby

Nov 26, 2012 at 09:10

We start the week again with a feature on pensions. The problem here is that nobody really knows what to do about them and it is this very uncertainty that acts as a disincentive.

To meddle with the tax-free lump sum on existing pension funds would be retrospective taxation.

I will be encouraging my young son to build his own portfolio. Putting money into pensions is the easy bit, getting it out without knowing when and at what tax rate is impossible.

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Stephen Court

Nov 26, 2012 at 09:11

The vast majority of people take their 25% lump sum as they have paid (or waited) for years to get it. The fact that it is tax free is a bonus. Why should someone be forced to take it all as income and which is taxable.

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David McCabe 1

Nov 26, 2012 at 09:12

Haven't they realised that the constant tinkering with the rules & regulations surrounding pensions is one of the main reasons people decide not to save? Stop trying to change things so frequently & allow individuals to plan, for heaven's sake.

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Bob the Jock

Nov 26, 2012 at 09:15

Presumably those with pension mortgages would use their increased annunity income to service their mortgage debt until death or their home is repossesed, whichever comes first?!

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Philip Challinor

Nov 26, 2012 at 09:15

As much as I rated this paper (when it was published this summer) this was one aspect I did not agree with. The paradox with pensions is that funds are locked away largely for the investors' own good - given access to it too many people would withdraw the lot after a perceived poor return, spend it and having nothing to show for it at retirement.

The rest of the paper has some very good ideas and I recommend the powers that be within the industry give some serious thought to them, just not necessarily the one in this article.

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Xiang Xhi

Nov 26, 2012 at 09:30

@ Harriet - because it is the easiest 10 diploma credits an adviser will ever earn? It's not as if all existing pensions will suddenly become ISA's is it? If anything, your knowledge of a legacy product will make your expertise very sought after.

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Nov 26, 2012 at 09:35

Have the even thought that many professional people took out mortgages in the 1990's with the intention of paying them off via their PCLS at retirement, Remove the PCLS facility and that would have serious implications. Twenty more years of mortgage interest payments with varying interest rates attached!!!.

Also, if no PCLS, many investors would probably decide to fund ISA, rather than pension.

Have these people ever considered that the bulk of the UK population does not have £30,000 surplus income to squirrel away each year - they do not even earn that.

Typical - totally out of touch with the man on the street.

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Paul Barnard

Nov 26, 2012 at 09:37

Another week, another idiot, though this one popped up last week as well. Lovely cardigan he's wearing too. Speaks volumes.

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Xiang Xhi

Nov 26, 2012 at 09:37

What a great way to encourage the population to stop their reliance on state pensions and benefits. Stop giving incentives to save into pensions and stick all your money in ISA's which can be accessed at any time, at any age, for any purpose. Great outside the box thinking there.

If the government truly want to save tax short term, why don't they encourage the wealthy to pay more into the pension pots of children and grandchildren whilst reducing contributions to their own pots, by increasing the amount from a measly £3,600 each year? The reduction in the lifetime allowance would be easier to swallow if BRT relief was still on offer for this type of contribution up to, say, £10,000 per year.

Future generations are already going to suffer enough for the mess we've left them, so let's give them something back!

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I'm an IFA - get me out of here

Nov 26, 2012 at 09:58

Come on, it is time they changed the Pension rules again. I have almost got up to speed on Pensions Simplification and if they change things now I can forget having to try and learn the subsequent changes and concentrate on the new rules.

I have been in the industry 36 years and the only thing that is conisistent about successive Govt's is that they always mess up Pension legislation.

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Nov 26, 2012 at 10:05

Why not cap tax free cash amount at say £150,000 (or some reasonable figure & no I have not done the calculation!) leaving the rest to purchase an income & thus garner tax receipts that way? - How does cutting the allowable contribution encourage saving for retirement.

Cutting tax relief to help ISA limits makes little sense as income from ISA's is tax free? So no gains for the Govt coffers there?

The net result of continual changes to pensions, legislation and regulations is that more people will have less in retirement.

Encourage saving for those that don't - Don't penalise those that do!

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Ian Lees

Nov 26, 2012 at 10:17

Harriet - remind me why anyone bothered passing ( or taking ) any financial services exam - as the Gov't and their quango the FSA - insist on putting in place - regulation at huge costs and then jump on the Boards with huge salaries. They then change the rules, so that your exams become redundant. Universities are losing potential students, students are paying huge amounts of money taking outvast loans on tick and credit parents are mortgaging themselves up to the hilt p oensions simplification is here - auto enrolment ( The Peoples Pension ) is here - and Islington council are using theri pension fund for investing in " Residential Property " according to the FT today. Now what was. . . . , the reason for taking exams ? . . . credibility ? honesty ? trustworthyness ? competence ? none of which will apply to the next range of products.

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Jack the hat

Nov 26, 2012 at 10:28

I think this paper has lots of merit. The figures are not good reading in terms of value for money for government investment or the majority of people needing a pensions benefit it seems. For saving proposals to work properly, a long term view must be taken. I think the move to stop lump sums is correct and to ban higher rate relief but matching with real incentive for basic rate tax payers, ie 30% relief for all and encouragement of family planning.

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John Smyth 3

Nov 26, 2012 at 10:29

Let us be totally honest about this.

People on the average or below average wage after paying off student loans, buying a house and furnishing it, buying a car, bringing up a few children can not afford to put meaningful amounts of money into a pension plan. These people make up the vast majority of our population. Politicians, actuaries and economists are just going around in circles and avoiding the central issue. For years the system has been giving huge tax reliefs to the better off and those working in government organisations or fortunate enough to be in good final salary schemes who are the minority.

The better off do not need encouragement or help to save for retirement or anything else for that matter. They have plenty of surplus income with which to do it. The less well off, the vast majority of the populattion, are the ones who need the encouragement and help.

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Nov 26, 2012 at 10:33

What a terrible idea.

I am one person who intends to use mine and my wife's PCLS to pay off our mortgage, when the time comes.

ISA's are great, but as has been stated most people don't have more than £10k left sitting around each year to make use of the current allowance. Although of course I'm not sure the Tories are aware that the general public don't have huge slush funds left by daddy-kins and £60k plus wages.

Out of touch? they've lost the use of their fingers.

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j p

Nov 26, 2012 at 10:34

The lack of consistency in thought processes is hard to believe. the tPR and Steve Webb amongst others were concerned that if individuals were given cash in an Enhanced Transfer Value exercise it might influence them to make poor decisions.

Well the difficulty here is that these poorly thought through proposals do exactly the same

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Nov 26, 2012 at 10:39

Even the last Labour government didn't lose credibility as fast as this one has.

They were clueless and this one is inept, What next??

The "young generation" are borrowing off their parents to maintain their lifestyles with no intention of ever repaying the debt. This Government is "taking" from everyone so that their banker chums don't suffer. Find a way of extracting more from pension, more from motorists and in fact more from everyone who pays their taxes on shore.

What a circus this country has become

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Mike Morley

Nov 26, 2012 at 10:40

I think Tony Wickenden's quote in support of the abolition of Tax Free Cash omits the very wise words of Nigel Lawson who described this anomaly as "much loved"! Remove it at your political peril - as has already been pointed out for every person who regrets taking the money there are nine that don't! As they say in the USA - "Do the Math".

More tinkering with reliefs and allowances will reduce further the public's inclination to save in pensions and with the threat of dire annuity rates for many years to come thanks to Q E who in their right mind would not take their PCLS unless they were fortunate enough to have an attractive Guaranteed Annuity Rate attached to their pension.

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Peter Kibowe

Nov 26, 2012 at 10:48

We take the bait again. Line hook and sinker!

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Nov 26, 2012 at 10:54

The bottom line is that th UK cannot afford the current benefit system and that includes state pension. Decisons made have minimal to do with ensuring people have sufficient income to live on in retirement (they cannot be, as everyone has discretion to spend their income as they wish - and millions earn nothing). Decisions are based on what the country can afford and how much they need to 'rake in' in tax to pay for it. Our NI and tax just goes in and out 'hand to mouth' to cover expenses.

The only way to help fill the void is to raise taxes or reduce the amount of relief given - and probably both. I personally would not mind paying more tax, providing that 'any' Government did not waste it. I would also be happy to pay a token amount each time I went to the GP or to Hospital to help the NHS. Lets face it, the Govt are totally out of touch with reality of peoples everyday lives. Stick each one of them in a situation whereby they and their families have to survive on £20,000 a year in a regular home in a regular street in the UK and make them work one day a week in a 'normal' job. Leave them for 1 year and let us see how much they manage to save for retirement then.

Its about time we had politicians who were 'normal' people, a Govt who 'held back' funds to help its own people and not give bucket loads to other countries, improved education for all, jobs NOT created abroad at the expense of jobs at home for own people.

You cannot force people to save for retirement when they cannot feed their own families NOW. If you take away PCLS less people will save into pension plans. NEST will not improve matters in the longer term it will simply potentially take people out of benefits by giving them a meagre boost to income - they will then be worse off potentialy as they will not be able to take advantage of other associated benefits that may have come their way. All you are doing is lining the pockets of the people in charge -and they are sitting back laughing all the way to the bank.

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Richard Arnold

Nov 26, 2012 at 10:55

Looking beyond the smoke and mirrors and the remit given, the “Think Tank” suggestions suggest that the current UK financial position is far worse than the government would wish the general public to know. The obvious needs to address our situation would not secure votes for the Government to be re elected at the next general election. So as illogical as these measures are for the long term interest of the country its votes that count.

There is a desperate need to be inventive around the area of later life financial needs and accumulated pension funds. The trick is to keep both the incentives for accumulation, deliver additional tax revenues to combat today’s crisis with the insight to address the time bomb demographics of 2025 and beyond.

Sadly the RDR has diverted the best minds and resources of the financial services industry to a raft of FSA overstated consumer priorities.

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Simon Hughes

Nov 26, 2012 at 11:00

How about you deal with the extremely generous public sector DC scheme's and we will all be better off before you start attacking those people who aren't costing the country billions. Think there was figures quoted of saving of 7bn before the govt backed down as usual

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Nov 26, 2012 at 12:11

Spot on Simon. Come on politicians lead by example. Stop membership of your expensive final salary pension. What's good for the goose and all that! That would save a packet. Then what about the final salary scheme at the FSA. You should all join NEST because if you say this is good for the workers then it has to be OK for you lot because you're the ones saying " we're all in this together"?

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Philip Wise

Nov 26, 2012 at 12:12

I've never understood why people need a lump sum so much when they retire that taxpayers give them a subsidy to save up for it. Why should people pay more basic rate tax, VAT etc, so some people get a nice tax free lump sum?

Including the lump sum with the pension also creates financial planning problems, particularly for investment linked schemes. If somebody really needs a lump sum of a particular amount, they are forced to de-risk the whole of their pension pot, and that may not be the right thing to do. We all know that you invest money in a different way if you are saving up a lump sum than if you are saving up for income. So, if you are going to present richer people with a taxpayer subsidised lump sum, then it should be held in a separate plan to the income for retirement.

I accept that it would be unfair to take away the lump sum retrospectively, but there is a lot of sense in removing it for future contributions.

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bob lawrence

Nov 26, 2012 at 12:33

If the govt were to remove the PCLS (I still call it the Tax-Fee Cash Sum) at a stroke, it would be the worst possible piece of retrospective legislation. No doubt the politicians would find a way to exclude any such rule from their own gilt edged, gold plated pensions that you and I pay for. (Incidentally - the IFA sector also pays for the FSA's Gold plated F/S Scheme).

So 10% don't care about giving up the TFCS? They are probably all in F/S schemes where the commutation rate for the PCLS is rubbish!!!

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Nov 26, 2012 at 12:33

If there were no pcls, tfc, or whatever it is going to be called next, there would be few takers for any private scheme.

The best way that the Gov't could induce people to take out private pensions would be to tax the funds throughout their currency, but then give tax-free INCOME to matured plans. Then people would save in pensions, and HMRC would get tax-revenue

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Ian Lees

Nov 26, 2012 at 12:34

Dear Mr Wise . . . the availability of a tax free lump sum from the age of 55 onwards provides an additional incentive - to assist with the opportunity of building up a fund of money to assist with income in retirement. It can be used to repay a mortgage loan, or buy a yacht, a car or for an expensive otherwise unachievable holiday. It is like a bonus at retrement for all those hard yearsof work, to promote saving - in a tax effieint way. with the conservative coalition gov't considering removal of Higher Rate Tax on contributions - the £ 500M defict in council pension scheme reported in the FT today - the destruction of Trust in Pension Schemes and their Trustees e.g Scottish Widows and Aegon - it is most understandable that people do not trust their life savings to such abhorent, unnecessary and evil Trustees.

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Nov 26, 2012 at 13:09

Is this a psychological trick? Think tank talks about outlawing lump sums so when the debate moves towards a negotiated solution we all accept that lump sums remain, but become taxable?

Leak out the worst possible news then backtrack so anything less is a welcome relief. It happens in every budget these days.

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Philip Wise

Nov 26, 2012 at 13:16

But it's not a very good incentive, and it creates problems with asset allocation for pensions, and it encourages people to place money with those trustees you dont like.

It's also outdated - it's rare, in my experience, for clients to want the lump sum at the same time as the income; the lump sum causes particular problems if people want the income, but dont want the lump sum for a few years.

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Jonathan Kirby

Nov 26, 2012 at 13:39

This gets churned out year after year after year.

Perhaps the government would like to stop people paying into personal/money purchase pensions altogether?

They would then get more tax receipts but nobody would save much and it would be Dave's £140 old age pension for all.

All that money going into pension funds would grind to a halt and markets would collapse.

The economy would go down the pan as the ageing population spends less and less in retirement and so it goes on.

Stop meddling!

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Nov 26, 2012 at 13:55

The way annuity rates are going, anyone earming a normal salary and retiring in 20 years time may as well accept that they will get 'very little' for their hard saving over the years.

Perhaps GIdeon would like to consider 'means testing' the state pension and remove all higher rate relief on pensions.

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Nov 26, 2012 at 14:48

Pensions in this country have reached crisis point and the fundamental reason is the constant tinkering of the rules by successive governments.

The Tax simplification of pensions in 6 April 2006 was supposed to introduce greater transparency, understanding and certainty and the opposite has happened since that time.

Constant changes to the Life Time Allowances, reductions in annual allowances gaining tax relief, rumours of the removal of tax free cash on retirment.

Why oh why can they not leave pensions alone, it has to have stability and certainty otherwise people will simply not invest and more and more people will become dependent on the state or live an impoverished existence in retirement.

It is undoubtedly the biggest scandal in a modern society where people simply do not know what they will or will not be able to do as they save for their retirement.

A disgrace!


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lee rawding

Nov 26, 2012 at 15:08

In my experience running an annuity service lots of people do want the tax free lump sum to spend and/or generate other, perhaps more tax efficient, income streams and keep control of their own capital (not yet a 'capital crime' I hope).

Let's face it with this subject coming onto the agenda twice a year if you had any intention of taking it in the future you'd need to think long and hard about delay with all this apparent uncertainty.

On the broader subject of the paper there are one or two good ideas but rather than taking a 'blank sheet' approach the author seems to have concentrated on overcoming some, possibly rather ephemeral, perceived objections to pensions and a healthy dose of industry distaste in his proposed solutions.

It doesn't seem any less complex to me, rather the contrary, but no doubt the paper will appeal to some hardy souls who won't have to worry about it's repercussions anyway.

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Paul Barnard

Nov 26, 2012 at 15:21

Doubtless, by spending their capital in this way, they too are "tax avoiders" and should be pilloried by the holier than thou members of select committees!

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Keith Cobby

Nov 26, 2012 at 15:38

The financial world seem to be spinning at an ever faster rate. Whatever happens in the Autumn statement it could all be changed next year. This is not conducive to financial planning.

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l'ifa passeport en provenance de France

Nov 26, 2012 at 17:48

Off plan property in Spain anybody ?

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Nov 26, 2012 at 17:59

"Johnson (pictured above) supported his call to scrap the lump sum with research from provider Prudential which showed 10% of those who had taken the lump sum regretted doing so."

Does that mean that the other 90% had no regrets whatsoever??

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