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Budget 2011: Tax proposals to take centre stage for pensions

Tax reform ideas are expected to dominate pension news in today’s Budget after the Office for Tax Simplification recommended a merger of income tax and national insurance.

In a report published on March 3, the OTS proposed joining the two regimes as part of a range of radical changes to the UK tax system.

Hargreaves Lansdown head of pensions research Tom McPhail says this would be a “complex trick to pull off”. He says: “Pensioners would suffer higher tax rates unless age allowances were increased to compensate, capital gains would be significantly more attractive than income and pension contribution tax relief would have to be rethought.”

The OTS has also proposed the abolition of contracting out for final salary schemes, a reform which could save the Exchequer around £9bn and potentially allay Treasury concerns over the cost of implementing a flat-rate state pension for future retirees.

Industry experts say a formal announcement on any state pension reform in the Budget is unlikely, with the Government keen to ensure it receives maximum publicity ahead of automatic enrolment. However, pensions law firm Sackers expects Chancellor George Osborne to indicate a target-date for implementation.

The DWP and the Treasury remain tight-lipped over any potential announcement, although Work and Pensions Secretary Iain Duncan Smith recently made a speech pledging to “fundamentally simplify” the state pension system.

In January pensions minister Steve Webb told Money Marketing that any state pension reform would continue to be based on National Insurance contributions. The DWP has also confirmed that any changes would apply to future retirees only.

However, an announcement has been delayed for three months as officials from the Treasury and the DWP attempt to reconcile issues of cost and complexity.

Government officials have held discussions with senior industry representatives during this period in an effort to establish how people who have contracted-out of Serps and the second state pension should be treated. The DWP has previously said it is considering “a range of reform options”.

Legal & General pensions strategy director Adrian Boulding says the reform is crucial to boost private pension saving. He says: “At the moment people are in the dark about how much they need to put into their company pension scheme.

“But if we can get a state pension that is simple enough so everybody can see what the Government’s going to provide then people can decide whether that’s going to be enough and if it’s not, how much they need to put into their company plan.”

The Chancellor could, however, produce a response to the call for evidence on allowing early access to pension funds, which closed on February 25. The Treasury is understood to be sceptical about the benefits of the proposal, although Steve Webb has been a strong advocate of allowing savers to draw up to 25 per cent of their pension fund before age 55 in certain situations.

Standard Life head of pension policy John Lawson says: “I wouldn’t expect the Treasury to come out in favour of early access. They might rule it out completely or look at conducting further research into improving flexibility, including perhaps bringing Isas into the mix ahead of 2012.”

Osborne should also give an indication of whether Lord John Hutton’s recommendations on public sector pensions reform will be implemented in their entirety. However, while Hutton has set out a blueprint for structural reform, he has left crucial decisions over contribution and accrual rates to Government.

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