The government is to launch a consultation on changes to pension tax relief, Chancellor George Osborne announced in his summer Budget today.
Osborne (pictured) said the government was open to further “radical change” to pension and retirement and would conduct a wide-ranging review of pension tax relief to encourage a better savings culture in the UK.
Among the initial ideas being mooted is taxing pensions in a similar way to ISAs.
He said: “Britain isn’t saving enough and that’s something we need to fix in our economy too.
“While we’ve taken important steps with our new single tier pension and generous new ISA, I am open to further radical change.
“Pensions could be taxed like ISAs.
“You pay in from taxed income – and its tax free when you take it out. And in-between it receives a top-up from the government.”
However, Osborne (pictured) said the idea needed “careful and public consideration” before it is implemented and announced the launch of a green paper that “asks questions, invites views, and takes care not to pre-judge the answer”.
The National Association of Pension Funds (NAPF) welcomed the announcement.
Chief executive Joanne Segars said: “We are pleased the Government has wisely chosen not to rush into any new wider reforms or jump to conclusions about what will work best as a reform, such as taxing pensions in the same way as ISAs. This will be an important step and we will work with the government to secure a clear understanding of the long-term implications of any decisions.
“For this review to succeed it must look at taxation of pensions in the bigger picture of what genuinely incentivises people to save consistently over the long-term for their retirement.”
Barnett Waddingham senior consultant Malcolm McLean warned bringing pensions and ISAs together under the same tax regime arrangements would be a “major change” and the ramifications need to be carefully thought through.
He added: “As always with pensions, which are a long-term savings vehicle, the change over from one system to another would require some fairly complex transitional arrangements to be put in force to smooth the operation going forward. It is good that the government is consulting on all of this and not making the mistake they made with the pension freedoms which were brought in hastily and without full consideration of all the issues that could arise.
“Given the importance of salary sacrifice as a means of incentivising, it is good at the moment at least, that the government have resisted the urge to axe this form of relief which is widely viewed as a positive ‘win win’ for both employer and employee.”
Elsewhere, the government restricted the annual amount people with an income of more than £150,000 can pay tax-free into a pension to £10,000.
Fidelity Worldwide Investment head of retirement Richard Parkin said: “This latest initiative to limit pension tax relief for top earners disenfranchises even more layers of senior management. This could undermine the willingness of companies to value pensions as part of their benefits systems.
“Fiddling with pension tax relief to fund giveaways in other areas is an example of great politics but bad policy especially considering that a review of pension tax relief is now underway. These presumably temporary changes will be difficult to operate and create further complexity for the industry at a time when it’s still trying to deliver the pension freedoms.”
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