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Prime Minister urges Osborne to soften pension tax relief overhaul

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Prime Minister David Cameron is urging George Osborne to “play it safe” on pension tax relief reform in the Budget after a cacophony of protest from Conservative backbenchers, the FT reports.

The Chancellor is weighing a number of radical reform options for the pension tax system. The nuclear route would see pensions taxed in a similar way to Isas, while a flat rate of relief – favoured by many in the industry – is also being considered.

However, Osborne has been warned he risks invoking a “riot” among his party if the reforms hit Conservative voters during the EU referendum campaign.

“Europe is the only game in town, now is a time for caution,” an ally of the Prime Minister told the FT.

Another Cameron colleague says Osborne will have to “tread very carefully and sensitively”.

A Treasury insider is quoted as saying “the pensions question is still open”.

They add: “It’s difficult and controversial. But George always looks to carry out reforms. This won’t end up being a boring Budget.”

The warnings come after consultant Hymans Robertson said replacing the existing pension tax system – where savers receive tax relief at their marginal rate – with flat-rate relief would leave middle class savers facing a “retirement crisis”.

Its analysis showed 40 per cent taxpayers currently face the biggest retirement shortfall and will be worse off if the Government backs a flat rate.

Meanwhile, respected think-tank the Institute of Fiscal Studies argues replacing the current system with a flat rate model set at less than 30 per cent would mean higher-rate taxpayers would be “actively discouraged” from making pension contributions.

It says: “As far as tax is concerned, they would be better off saving for their retirement via an Isa or a more expensive home.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. About time Orrible Osborne was kept on a shorter leash. The Tories have enough problems with Europe, austerity and the economy without alienating droves more.

    The economy is going to Hell. Totally reliant on people getting into debt and spending what they don’t have. Latest figures show that borrowing is at a stratospheric £1.5 billion a MONTH! Instead of curtailing this lunacy by raising interest rates (and steady Sterling at the same time) the policy is to ensure that the banks have sufficient reserves to withstand bad loans when these people default. Am I mad or is it the others?

  2. What is needed is stability, not perpetual meddling, fiddling, tampering and reshuffling the cards in the deck. Is enhancing the basic rate of tax relief allowed on pension contributions likely to encourage more retirement saving? For as long as the sword of Damocles hangs over the 25% TFC at retirement allowance, I suggest absolutely not.

    • Yes Julian, as ever you are right. But when have we ever had stability in the last 30 years? What we need is a completely hung Parliament so that the numpties in Westminster are completely hamstrung and are not able to do anything at all. Unfortunately this may not last (at best) more than five years, when we could do with it lasting 15.

  3. I actually think that the vast majority of voters will not give a toss about pension reforms – I sort of think that all politicians forget the silent majority and the opinion of the politicians does not matter one iota – those people will vote according to how they feel, not because some posh Tory (or Labour or whatever) tells them what to think.

  4. “Meanwhile, respected think-tank the Institute of Fiscal Studies argues replacing the current system with a flat rate model set at less than 30 per cent would mean higher-rate taxpayers would be “actively discouraged” from making pension contributions.

    It says: “As far as tax is concerned, they would be better off saving for their retirement via an Isa or a more expensive home.”

    So good advice is, according to the IFS, to consider your home as your pension?

  5. Any tax relief is better than none.
    Osborne has to raise more cash and this is one of his chosen routes, pure and simple.
    It does not make pensions bad.

  6. We live in a world where there is an endless drive for money, it matters very little if you are a government, company, quango or individual, it all comes down to, “we need more than we got last year” George Osborne is guilty of nothing more, than trying to fix the oldest of problems in the newest of ways……its about time he just ditched pensions altogether… be done with them, cast into the bin, to be honest they have been tinkered with so much now they have morphed into something akin to Frankenstein’s monster….. no wonder, when you dare utter the word, or even think pensions, you end up with the brain dead “uuuurrrrrggggghhhh” resonating through you head and the heavy footed stomp with arms stretched out in front to the nearest barn fire !

    Come on George put us, and the rest of the country out of our torment !

  7. The industry has shown over many years that it is not to be trusted and so we have to expect government and regulator to continue to make changes without a proper consultation – for those in the industry the challenge is to deal better with constant change. Not sure ‘any tax relief is better than none’ when pension savings are subject to tax on withdrawal, and we could lose TFC. Completely agree with Harry in that we need government to support the move to a savings culture rather than a borrowing one. Difficult to see the rationale for a flat rate of tax relief on pensions as anything other than a boost for the treasury coffers rather than a support for savings!

  8. Maybe it would work if there was minimal tax relief, but once a pension is drawn, it should be tax free income and the remnants inheritable tax free. Spent money will still go back into the economy.

  9. Uk pensions have offered very poor returns and only ever got sold because of tax relief and TFC. Without one or both the service levels and Investment performance of those offering retirement vehicles would have been laid bare for all to see. Simply appalling. The Industry and the whole retirement savings strategy needs a total clean out. It cannot come soon enough.

    • A bad workman blames his tools. A Pension is just a (currently) tax efficient tool. To blame performance on the fact it is a pension misses the point as you can hold pretty much the same things in as outside a pension. Poor performance is a combination of poor or inappropriate investment decisions and excessive charges.

  10. DC 30% Gross Tax relief = 42.86% of Net. e.g £700 contribution + 42.86% Tax relief = £1,000 Gross Contribution. DC Pension in Payment = 25% Tax Free Cash (currently) balance at marginal rate 20% up to £43,000 (2016/17 tax year) = actual tax rate of 16%.
    What is the problem?
    HRT / ART payers will still save in pensions up to LTA – no CGT, outside IHT calculation, 42.86% on net contribution.

  11. Christine Brightwell 7th March 2016 at 12:42 pm

    I have read the views above with interest. I would not be terribly put off by a flat rate 30% on contribution to pensions. I am though concerned about the threat to the tax free lump sum – which many people with modest pensions use to clear debts, dent the remains of a mortgage etc.
    It seems to me that GO is a bit like a very impatient baker. Lets change the recipe and see if that makes things better – its nearly cooked and the results will be seen – but no, chuck out the half baked loaf and start a new batch with another new recipe. Resulting in rather hungry people.
    Patience is a virtue – and patience to let changes to the pensions regime bed in and then review the results in a considered and measured way would pay back in better understanding for all and less uncertainty for savers. The savers I refer to are those who were careless enough to be born without a trust fund to fall back on – I know I know, they should have thought about that before being born without two silvers spoons in their mouths.

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