Chancellor George Osborne is to announce the results of the government’s consultation into the tax relief on pensions in the Budget on 16 March. Amongst his options are a flat rate of tax relief or a new pension Isa.
A pension Isa would have tax relief on contributions limited to 20% to encourage people to save, but all withdrawals would be paid of free of income tax. Tom McPhail, head of retirement policy at Hargreaves Lansdown says this could cause numerous problems.
“Investors don’t trust politicians not to muck around with the pension system, with good reason. An Isa style reform with tax relief being scrapped in favour of tax free withdrawals would create the risk of a future Northern Rock style run on the pension system and the UK stock market. Any hint of political interference in the future could result in billions of pounds being withdrawn overnight; it would be hugely unstable.”
Political issues aside, Mr McPhail also says that the removal of higher rate tax relief would make it much harder for mid to high earners to build up their pots.
“The offer of a 20% top up, with tax free withdrawals looks superficially attractive, however any change to pension taxation will involve cuts to the tax relief available. This is likely to be particularly bad news for anyone who becomes a higher rate taxpayer towards the end of their working careers when they are most able to catch up on their pension funding.”
Mr McPhail adds that if the change goes ahead, savers could expect to see the annual allowance to contribute into a pension fall from £40,000 to around £10,000 a year.
“For a higher earner, it would mean exchanging 40% relief on £40,000 for 20% relief on £10,000; a loss of £14,000, in exchange for a paper promise from a politician which would depend on a future government for its honouring.”