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Steve Webb demands end to pension tax relief tinkering

Pensions minister Steve Webb has called on ministers to cease tinkering with levels of tax-free pension savings – weeks after the Coalition announced a further cut to the lifetime allowance.

Osborne announced the limit for tax-free lifetime pensions savings would be cut from £1.25m to £1m in last week’s Budget, effective from April 2016.

It is the latest in a long line of incremental changes to pension tax allowances overseen by this Government. In 2010 the lifetime allowance was reduced from £1.8m to £1.5m, while the annual allowance was slashed from £255,000 to just £50,000. In December 2012, Osborne again set out plans to lower the lifetime allowance by £250,000 and the annual allowance by £10,000.

Speaking at the Institute of Chartered Accountants Scotland’s general election debate yesterday, Webb – who has previously advocated shifting to a flat-rate of tax relief – said such adjustments are proving counter-productive.

He said: “We can’t go on with a situation where every fiscal event, every Budget and every Autumn Statement we ask is there going to be another tweak, another twiddle or another fiddle, because it’s not steady state.

“In my view we need flat-rate tax. It’s viable to give a pound for every two they pay in. That’s 33 per cent relief and if you did that and had a sensible annual limit then you wouldn’t need a lifetime allowance at all, and you can see we need that simplification.”

Treasury financial secretary and Conservative MP David Gauke said while a period of stability for pension tax relief would be “helpful”, a flat tax rate would not necessarily represent a positive change.

He said: “It’s not an easy or quick reform in itself, and I’m not sure that it necessarily leads us to a simpler position.

“I would argue that there is a balance to be struck between the costs of tax relief but also ensuring that we do encourage people to save, and I believe that we are striking the right balance.

“It was right to reduce the LTA as we did in the Budget, but then as we have said we will then index that from 2018 onwards so that we aren’t sucking in people in their forties and finding a higher and higher proportion of people are hit by the LTA.”

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  1. So no more tinkering with tax relief, execpt for Steve Webb’s favoured piece of tinkering.

    As for David Gauke’s comment:

    “It was right to reduce the LTA as we did in the Budget, but then as we have said we will then index that from 2018 onwards so that we aren’t sucking in people in their forties and finding a higher and higher proportion of people are hit by the LTA.”

    The LTA will index in line with CPI. I would hope that most people’s pension funds are going to grow faster than CPI over the long term, so there certainly will be a higher and higher proportion of people being hit by the LTA.

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