You may have picked this up over the weekend. It was almost a racing certainty that the Chancellor, George Osborne was going to tinker with pension tax relief after a long, industry-wide consultation. Just goes to show that you should never bet, even on favourites!
‘Chancellor George Osborne has dropped plans to end or alter tax relief on pension contributions. A proposed scheme would have scrapped upfront relief, worth an estimated £21bn to savers, but made pension pot withdrawals tax free. An alternative option was to set a flat rate of tax relief, which may have been unpopular with higher earners.
Labour’s shadow chancellor John McDonnell said Mr Osborne was “yet again ducking a big decision”. Campaigners said he had missed a “huge opportunity” to tackle pension inequality and help the lower paid. But others said he was right to protect existing reliefs, and that radical reforms would have created new risks and imposed new administrative burdens on employers.
Mr Osborne had been expected to unveil changes in the Budget on 16 March, but a Treasury source said it was “not the right time” to make changes to pension tax relief.
The relief allows some of a person’s earnings that would have been taken by government in tax to go into their pension instead. Under the current system, pension savers receive tax relief at the same rate as their income tax – meaning basic rate taxpayers receive relief at 20% and higher rate taxpayers at 40% or 45%. The proposal to introduce arrangements similar to an Isa, with no tax relief on contributions but with withdrawals free of tax, would have given a significant short-term boost to the government at the expense of lower tax revenue later. An alternative option considered by the Treasury was for flat rate relief, which would have benefited basic rate taxpayers and cut reliefs for higher earners.
Mr Osborne was warned ahead of the Budget that introducing Isa-style arrangements could prompt a mass withdrawal from pension funds. Conservative MPs had also become concerned about the impact on their constituents of any move to flat rate relief, which would have reduced breaks for higher rate taxpayers. BBC political correspondent Eleanor Garnier said Mr Osborne’s decision was also a recognition of how fragile the EU referendum campaign is and removed the risk of upsetting voters ahead of the vote on 23 June. An ally of the chancellor told the Times that Mr Osborne did not want to put people off saving. “Now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head. The prospect of radical reform had also been opposed by the pensions industry.
Changes to the pensions system in recent years have included automatic enrolment into workplace pensions in 2012, and people aged 55 and over being allowed to take their retirement pots how they want rather than being required to buy an annuity retirement income – introduced in 2015.’
So there you have it. Apparently, unlike Margaret Thatcher in the 1980s, this Chancellor is for turning. Or should it be not turning at all?