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.”