Chancellor urged not to repeat Gordon Brown’s pension mistakes
Former pensions minister Steve Webb, is warning Chancellor George Osborne not to replace the existing system of pensions tax relief with a new, pension Isa.
Mr Webb, now Royal London’s Director of Policy, compares the idea of a pensions Isa – which would have limited up front tax relief but pay a tax-free income instead – with Gordon Brown’s now infamous raid on occupational pensions in 1997.
He says: “Replacing tax relief with a Pensions Isa could be George Osborne’s ‘Gordon Brown’ moment. The former Chancellor probably thought that raising billions of pounds from pensions through abolishing dividend tax credits was a complex change which few would understand but which would quietly raise billions from pension savers. But the legacy of that damaging change is still being felt today, and the former Chancellor’s name is forever associated with that measure.”
“There is a real danger that with the pension Isa, history could repeat itself. Abolishing tax relief on pension contributions would certainly raise large sums for the Chancellor, even if some of the proceeds were given back as a government top-up into pension pots. But the damage done to pension saving would be incalculable, as pensions are once again seen as a convenient pot for cash-strapped Chancellors.”
Read Moneywise columnist Jeff Prestridge’s column Stop chipping away at our pensions, Mr Osborne.
In addition to raising revenue for government coffers, Mr Webb says a pension Isa would be an administrative nightmare for providers because they would need to run parallel accounts for savers that already have pensions – one that is yet to be taxed and one that already has been.
He is concerned that because funds from pension Isa would be paid tax free, the so-called ‘Lamborghini effect’ would be exaggerated because there is no tax to discourage savers from making large cash withdrawals from their pension.
Chancellor George Osborne is expected to announce the results of the government’s consultation on tax relief and pensions in next month’s budget.
For the vast majority of people the best way to save for retirement is with a pension. Here’s how to start your pension today.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.