Summer Budget 2015: Pensions tax relief set for overhaul
George Osborne has announced the publication of a Green Paper, inviting the industry to consult on a radical overhaul of tax relief on pensions.
In an expansion of the pension freedoms announced in the 2014 Budget, the Chancellor said that pensions could potentially be overhauled to look more like Individual Savings Accounts (Isas).
It means pension contributions could be paid from taxed income – but with no tax paid when savings are cashed in. In return, tax relief would no longer be offered on contributions.
In the foreword to the paper – titled ‘Strengthening the incentive to save: a consultation on pensions tax relief’ – George Osborne said: "With increased longevity and the changing nature of pension provision, the government needs to make sure that the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement.
"If people are to take responsibility for their retirement, it is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save."
But Andrew Pennie, marketing director for Intelligent Pensions, said any change to pensions tax relief would do little to encourage people to save. "At a time of increasing life expectancy and a general inadequacy in individual pension savings, it is imperative we encourage people to save as much as they can into their pension. Any disturbance to pensions tax risks putting employers and employees off pension saving. Quite simply we cannot take that risk. The stakes are far too high," he said.
John Fox, managing director of Liberty SIPP, was more positive, stating: "There's no place for the faint-hearted in the pensions industry these days. The Green Paper will scare the life out of many traditional pension providers, but innovation, change and empowering people to save in the way that suits them best, are key to defusing the pensions time bomb.
"To say the government has shaken up the pensions industry would be a massive understatement."
The government has stressed that any change would be subject to full consultation and has acknowledged that although an Isa-style savings vehicle could help people better understand pensions, it may be that no change is deemed necessary.
Andrew Tully, pensions technical director at Retirement Advantage, commented: "This is a very broad consultation which is asking for views on a wide-range of options. However, it is a big deal that could fundamentally change how people save for their retirement in the future. A move to an Isa-style system would come with many complexities, as existing pension savings would need to be ring-fenced. It is also far from clear how a defined benefit scheme could be converted to an Isa-style system."
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.