Chancellor George Osborne has put reforming pension tax relief on the backburner until the Spring Budget 2016.
Osborne announced a wide-ranging consultation on overhauling how retirement savers would see changes to the amount of tax relief paid on pension contributions.
The move has attracted criticism from all sides – mainly because pension providers and savers feel they will lose benefits.
Osborne and the Treasury stand to save billions of pounds each year if higher and additional rate taxpayers receive less tax relief on their pension savings.
Osborne said: “The government has no preconceptions about this consultation. The industry and other interested parties have made a number of submissions that will be duly considered before an announcement in the Spring Budget next year.
“This will lead to draft legislation and reform to the current system.”
More pension reform on the way
Many consumer groups argue that the current system is unfair as the least well-off receive the lowest amount of tax relief and that this could discourage them from making pension savings.
The debate hinges around levelling out tax relief across all taxpayers – and Osborne has already set a precedent by decreeing higher rate taxpayers investing in property will lose half their finance interest relief by 2020.
Many pension providers are calling for ISA style pensions that pay no tax relief on contributions, but allow tax-free fund growth and tax-free withdrawals.
These no tax relief in, no tax paid out schemes would reverse the current pension model.
Savers are paid tax relief in at their marginal rate, allowed tax-free growth on their funds then receive 25% of their fund tax-free and pay income tax on further withdrawals at their marginal rate.
Flat-rate pension relief proposed
The switch would revolutionise pensions in the UK and save the government billions – but also mean a significant loss in tax revenues on pension drawdowns.
Pension provider trade body the Association of British Insurers (ABI) favours a flat rate retirement saving contribution bonus for all taxpayers, offering a £1 top-up for each £2 – £3 saved.
“Higher rate taxpayers get £2 relief for every £3 saved, while basic rate taxpayers get £1 for every £4 saved,” said an ABI spokesman.
“Our proposal would both encourage savers and make the Treasury around £1.3 billion a year better off.”
