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.
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