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Osborne prepares to unveil pension Isa in Budget

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George Osborne is set to announce sweeping changes to pensions tax relief that will see withdrawals made tax free.

According to The Telegraph, the Chancellor is preparing to unveil the controversial pension Isa in his 16th March Budget.

Under the plans up front tax relief would be removed entirely and replaced with a 20 per cent top up and tax free withdrawals, the newspaper says.

The move would bag the Treasury billions and far more than the current system or the flat-rate of relief also being considered as part of the Government’s consultation published last year.

But the industry and pensions minister Ros Altmann are openly opposed to the move, warning it could destroy the incentive to save in pensions.

Hargreaves Lansdown head of retirement policy Tom McPhail warns the move could prompt a “Northern Rock style” run on the pension system.

He says: “There are a number of reasons why this proposed solution is likely to run into difficulties.

“Investors don’t trust politicians not to muck around with the pension system, with good reason. An Isa style reform with tax relief being scrapped in favour of tax free withdrawals would create the risk of a future Northern Rock style run on the pension system and the UK stock-market.

“Any hint of political interference in the future could result in billions of pounds being withdrawn overnight; it would be hugely unstable.”

He adds: “We also anticipate that employers would may cut back on their workplace pension funding, limiting their contributions to the statutory minimums under auto-enrolment. This is likely to penalise the lower paid in particular as they rely more heavily on their employer for support with their pension funding.

“This scheme might save the chancellor some money but only at the expense of the country’s long term retirement plans.”

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. It is becoming quite clear that not only has Osborne given up on his ambition to be leader of the Conservative party, but also of them remaining in power.

  2. I really cannot believe that the Chancellor would be this stupid to bring in this type of system. I understand that he has to balance the books but this is short-sighted at best and just is more tinkering with a pension system that people do not trust because of the continual change.

    Not only will this cause major problems inside the pension industry and potentially cause stock-market problems, it will also fuel a housing boom which the Bank of England is desperately wanting the Chancellor to bring under control.

    What will be the effect on final salary pension schemes are we seriously going to add the notional increase value in the scheme to somebody’s income and then tax them.

    Has he really thought through the effects of the DC scheme with a fund value of £1 million to simply withdraw that money and invest it into buy to lets without paying any tax charges. If these proposals include legacy schemes, then we are likely to see a rush of money out of pension schemes and into property. We all know that there are taxes involved would buy to lets but this doesn’t stop the lure of property from many and if pension suddenly become tax-free withdrawals where is that cash going to disappear. How many crooks and property gurus are going take advantage of this at pensioner’s expense.

    This is simply irresponsible to both pension savers and first-time buyers.

    When will politicians look at cause-and-effect rather than short-term gains.

    Pension freedom yes – this however is madness!!!

  3. The Daily Mail seems to think that the plan to axe higher rate tax relief has been dropped – a pension ISA may be introduced but only for new workers entering the job market now. http://www.dailymail.co.uk/news/article-3475761/Osborne-axes-plan-target-middle-class-pension-pots-backlash-Tories.html

    The only thing we can say for certain is that nobody has a clue what will be announced, probably not even Osborne.

  4. Shameful short termism, Osborne is a fool.

  5. And how will a future Chancellor balance the books if none of us pay tax in retirement? Short term thinking to further his own political aspirations.

  6. I wonder if, on Budget Day, he’ll be telling us he has listened to feedback and has decided to postpone all pension-related changes, including the tapered Annual Allowance, and will instead reduce the annual allowance to £30k as an interim measure? At which point, focus shifts to a post EU referendum Autumn Statement?

  7. When will politicians understand that personal pensions are not a cash cow for the treasury to help balance the books in the short term. Pensions should be ‘de-politicised’ and the rules and regulations should only be able to be amended by a full and open vote in parliament. George Osborne introduced some radical and, it should be stated, good reforms recently that have certainly engaged many more people with their retirement provision, however he risks alienating those very same people if he carries out much more radical reform. I would support the end of higher rate tax relief and the introduction of a flat rate, of say 30%, as I would see this as a positive way of incentivising lower earners to contribute more of their earnings to their pensions. But Tax, Exempt, Exempt, abolition of TFC etc………….NO, that would be a recipe for disaster (in my opinion)

  8. Bloody hell talk (from a IFA perspective) about not knowing which way to jump…… i’m not sure how many bombshells, I can handle, one day you do something that is right for the client the next day its not !

  9. So mooting this ISA pension, will make the flat rate pension relief (20% / 30%?) combined with a reduction in the Tax Free Cash(PCLS) (to 20%) look really generous??!!

  10. Mark Coulter – bet you’re right. The Govt won’t risk a middle class protest vote in the EU referendum if pensions are wrecked. So we’ll be herded into staying in the EU then the pensions apocalypse will be unleashed. I am sure he will go the EET to TEE route in due course. It raises so much money and won’t be well understood at all by the public. It won’t affect historic benefits and the headlines will focus on ‘making pensions 100% tax free for hard working families’.

  11. And who is going to trust a future Government in 20,30 or more years time, not to renege on the deal?

    If Orrible Osborne does do this will there still be a lifetime limit and a limit on annual contributions? If he does abolish the limits then there may be hope yet for pensions. A £50k premium would be enhanced to £62.5 – £12.5k for nothing is still better than a smack in the face with a wet kipper.

    If this is not to be the case then ‘This is the end of pensions as we know them, Jim’.

    David Carter has spelled it out – Osborne looks like handing the next election to Corbyn. Form an orderly queue at the emigration desk. Corbyn AND Brexit! Nightmare on Elm Street.

  12. It’s all about keeping up house prices isn’t it? To hell with the future, must keep “the recovery” going.

    I am ashamed that I voted for his lot last year. If there was a General Election tomorrow I would write “None of the above” and walk out again.

  13. Julian Stevens 4th March 2016 at 4:41 pm

    How does The Telegraph know what Osborne plans to announce? My money would be on a reduction to the top rate of relief on contributions and possibly a reduction to the 25% TFC at retirement option. But who knows? We’ll just have to wait and see.

  14. Strange how contributors to this thread think that the pensions system that’s been in place has been successful. It hasn’t. Average pension pots at retirement have been as low as £38,000. Who ever gained the most from tax relief, the already wealthy. The one type of scheme that the public trusted , final salary based, have been scrapped. Osbourne is directly dis enfranchising the current Pensions Industry from the market based governance of the private retirement savings market. At last someone has seen that the UK pensions Industry are as bad as the banksters.

  15. I think all these commentators have fallen into a trap. All depends on how the 20 per cent top up is given and who can benefit. I agree that the current pension system is probably too cumbersome to change radically but what if the terms for contributing to a pension Isa were different to those for pension contributions and brought in, for example, to target many people who rely on state benefits? In other words those disenfranchised from contributing to a pension such as the 75+ year olds or the poor and untaxed (apart from a per annum £3600 sop)- but a most useful sop for non-working wives!

    In the same way simply stating as certain large platforms have that the new tax rules on interest and dividends still leave Isas as the first port of call for investors are wrong. From April 6th the argument for investing in an Isa will be much more nuanced and particularly for stocks and shares Isa where the first £5000 of UK gross dividend income will be tax free. Remember (and what product literature ever says this) an Isa investor cannot offset capital losses against gains outside an Isa wrapper.

    What is good news is that more complication increases the need for financial advisers!

  16. I think deposit accounts will see a run on funds if this happens, so for that reason he will be told it’s a ‘no’ by the people that really run the shop… The banks!

  17. Thank heavens – it seems not to be happening. Just being selfish of course.

  18. Well gents, it looks like Osborne took note!

    Sanity prevails (kind of….)

  19. Surely the only difference is that the tax position is reversed, none on ISA contributions but relief on pension contributions. Is it better to have full control of an ISA and have a tax free income, less paperwork??

  20. Christine Brightwell 7th March 2016 at 12:52 pm

    It would seem that GO views pension as a type of blood sport. Squeeze as much out as possible by changing the rules every year, chasing savers on and on. Herd the savers funds so that they go to ground, with no way out, no control – then send the terriers in to get whatever remains.

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