6th March 2016
The threat to pension tax relief in the next budget has been removed at least for now by the Chancellor of the Exchequer George Osborne.
National newspapers have widely reported an ‘ally of the Chancellor’ saying: “Now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head.”
A consultation paper issued last year had proposed possible reforms of tax relief, with fierce speculation in the last few weeks that the Chancellor George Osborne was in favour of a radical reform.
Experts said this could have seen tax relief equalised for everyone at 20% or removed altogether with pension income becoming tax free instead. This would have seen pension tax treatment mirroring that of the ISA.
The move was opposed by much of the pension industry. But experts suggest the plans, which would have given the Treasury a massive revenue boost, were also strongly opposed by Conservative MPs concerned that the move would antagonise natural Conservative supporters particularly among high earners.
It is also thought that the Prime Minister was worried that such a move could prove especially divisive in the run up to the Euro referendum.
The uncertainty surrounding the consultation has cost the Treasury £1.5bn in the form of additional pension tax relief, according to SIPP provider AJ Bell. The firm said that pension savers have poured billions of pounds into pensions in fear of reliefs being curtailed or abolished.
Andy Bell, chief executive of platform AJ Bell, has calculated that the speculation may have cost the Government a £1.5bn in extra tax relief and many thousands of investors were advised to take advantage of the higher rate reliefs while they were still available.
“The Government’s plan to reduce the cost of pension tax relief could have backfired spectacularly. Far from saving money, the uncertainty created by the consultation and scare stories from former ministers has led to a surge in pension contributions and there will be a heavy cost to this for the Treasury.”
“This re-affirms my long held view that trusting politicians to make significant policy decisions on pensions tax relief is like trusting a troop of foxes to babysit a brood of chickens.”
“The pension saving public would be better served by an independent Pension Commission with a mandate to manage UK pension policy and provide certainty and confidence to savers.”
Some in the industry say a long term threat remains.
Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “There were two front-runners for fundamental reform: a Pension ISA or a flat rate scheme. The Chancellor is believed to favour the Pension ISA but the idea met with widespread resistance from employers, investors and the pensions industry. By contrast the flat rate scheme would be more workable but perhaps wouldn’t have met the Chancellor’s ambition for truly radical reform.
“With uncertainties over auto-enrolment and the EU referendum, it appears the Chancellor has decided to put his plans on hold. Investors should look on this as no more than a stay of execution though; with the amount of money involved, it would be optimistic to expect that the Chancellor will just leave pension tax relief untouched for the rest of this parliament. Anyone looking for certainty should take advantage of the current tax relief regime while it still exists.”