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“Any hint of political interference in the future could result in billions of pounds being withdrawn overnight; it would be hugely unstable.”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