George Osborne has abandoned the idea of a pension shake-up, amid fears of a political backlash.
It seems the Chancellor’s ambitions for pension reform has hit the buffers. Faced with a political agenda dominated by Britain’s EU referendum, and the possibility that any raid on pensions would spark a backbench rebellion, George Osborne has reportedly put his pension plans on ice.
The Treasury had previously indicated that there would be sweeping changes to pension tax relief in the Budget later this month. Furthermore, reports last week seemed to indicate that the Chancellor was set to unveil the ‘pension ISA’, which would do away with the existing system of pension tax relief on contributions altogether. Contributions would be made from taxed income but withdrawals would be tax-free.
The more vanilla option – a flat rate of tax relief for all pension savers – had allegedly lost ground to the more controversial pension ISA proposal.
But according to unofficial Treasury sources, it now appears that there won’t be any changes to pension tax relief in this Budget.
Hints of a retreat emerged last week when it was reported that Mr Osborne had been told by the Prime Minister to curb his pension reform agenda. But apparent confirmation of a U-turn only came over the weekend, when a Treasury source said it was “not the right time” to make changes to pension tax relief.
Pension contributions can currently attract tax relief up to the individual’s highest marginal rate. Tax relief is automatically added to contributions at 20% (basic rate), but higher and additional rate taxpayers can claim an extra 20% or 25% respectively via their tax return. In terms of the deficit, this extra incentive for higher earners has been seen by many as low-hanging fruit; an easy way for the Chancellor to save billions. But the message coming from the government is that the current arrangements will be kept in place.
“Keeping the existing system means that no one will be worse off by saving into a pension,” says Ian Price, divisional director at St. James’s Place. “It also means that higher earners won’t be encouraged to look elsewhere [e.g. the housing market] to find ways to fund their retirement.”
Until last week, higher rate taxpayers would have believed they were on the cusp of losing their greatest incentive to save into a pension – they would probably have seen their income drop more dramatically in retirement than any other group. Thus they will welcome the climb-down.1
But the retreat will be a setback for the Chancellor, especially as he will have to deliver his Budget in the context of a worsening outlook for the global economy. Not only is he being driven to make further spending cuts, but he himself made a commitment to deliver a budget surplus by 2020. The approximate £7 billion2 a year that he could have saved by cutting pension tax relief for higher earners would have gone some way to helping him achieve his goals.
It is clear that the Chancellor still needs to reduce public spending, and that he wants to reform pension tax relief. Many experts will therefore expect him to revisit the latter sometime in the future.
He could, of course, decide to make savings in other areas of the pension system. For example, the current arrangement entitles savers to take a quarter of their pension tax-free when they start taking benefits; it could be reduced. Moreover, Price says that, regardless of potential changes, planned reforms effective from 6 April 2016 will reduce the availability of tax relief for wealthy savers.
“The lifetime allowance will be reducing from £1.25 million to £1 million,” says Price. “In addition, anyone who has an ‘adjustable income’ of between £150,000 and £210,000 per annum could see the amount they can invest tax free in a pension each year reduced.”
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
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1 www.hymans.co.uk, 15 February 2016
2 Centre for Policy Studies, November 2012