Prime Minister urges Osborne to soften pension tax relief overhaul


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.”