Chancellor George Osborne is setting his sights on raiding pensions to save the Treasury billions of pounds.
Following a consultation with providers and finance professionals, recommendations to change how tax relief is paid on pension contributions is expected by his Budget 2016 in March.
Osborne asked the industry whether moving away from the current pension regime towards pension ISAS would be a good idea.
Under current rules, contributions receive tax relief when they are paid into a pension. The contributions plus relief then grow in a tax-free environment, but payments are taxed.
Pension ISAs have taxed contributions, but funds grow tax-free and no tax is due when money is withdrawn.
Higher rate tax relief concerns
The Treasury seems to have leaked Osborne’s plans to see how they are received by savers and pension providers.
He seems to favour keeping the current rules but instead of paying relief on contributions at the retirement saver’s marginal rate, is opting for flat rate tax relief.
The pensions policy Institute has calculated 29% of tax relief on contributions is paid at 20%, 56% at 40% and 15% at 45%. The total amount of relief is around £21 billion a year.
Scrapping higher and additional rate relief to pay a 20% flat rate would save the Treasury £12.6 billion a year.
Former coalition pension minister Steve Webb, who now advises pension firm Royal London, hinted that the government considered up-front pension contribution relief was better than changing to pension ISAs.
No change expected for QROPS
“I’m not privy to the Chancellor’s thinking now, but it seems to me that the review has stimulated a belief that pension relief is going to change in the Budget and that the best outcome was a flat rate,” said Webb.
Changing how pension contribution relief is paid would not affect tax-relieved contributions already within a fund, only contributions paid in after a date set by the Chancellor, which is likely to be April 2017.
The lag between his announcement and start of the new measure would allow retirement savers to review their finances in light of the changes.
Transferring UK pensions to QROPS funds is likely to remain unaffected – funds with contributions relieved at 40% or 45% would remain at that amount.
