What would it mean if the chancellor scrapped tax relief on pensions?
According to former pensions minister Steve Webb, rules allowing savers to withdraw 25% of a pension pot tax-free in a lump sum when they reach the age of 55 could be scrapped, saving George Osborne £4bn a year.
Jonathan Russell, partner at UK200Group member firm ReesRussell:
“It would be no great surprise if the Government were to look at reducing the tax advantages of pensions although because of their long-term nature change can only come in over a period of time. At the moment the tax treatment of pensions is a bit of a nonsense where tax relief can be achieved at higher rates of tax than the tax that is paid on exit and the income earned is also outside of the tax net. Now would be a good time to change whilst employees are being moved into pensions with auto-enrolment and pension companies are getting poor press because of low returns on annuities. The concept of replacing pensions with some form of ISA-type scheme would make a lot of sense especially if all monies (pensions) drawn from the pot on retirement were treated as non-taxable.”
This would have many advantages for the Government:
· It would remove the tax relief on pension contributions as all contributions would now be tax paid accelerating the tax payments to the Government – something which is becoming a trend in current tax policies
· It would remove the sales pitch of tax relief where people were investing into pensions for the wrong reasons
· As an ISA-type investment where there should be no tax on exit this would substantially cut the reporting of ‘pension’ income and therefore the administrative costs associated with it
It would, however, have some disadvantages:
· Tax relief is one of the incentives to make people save for their pensions and this might mean fewer people would save – not an issue for the current government but a time bomb for the future
· As less money would be received by the pensions companies as there would be no tax relief, they will have less money to invest which could prove a damper on the economy – unless the extra tax taken by government is spent on stimulating it
· As with any fundamental change there can be difficulties in the transition phase
“Doing something like this would make it much simpler and hence cheaper to administer and we have had a threat for some time over the reduction of tax relief on contributions seen by many as a perk of the rich. The reduction of the maximum pension pot is already making many have to look at other ways of saving. The biggest question for government though will be how do they address the gold plated civil servant pensions and level the playing field.”