Government U-turn on pensions tax relief

7 March 2016

George Osborne has backtracked on plans to reform the tax treatment of pensions, following weeks of speculation.

The Chancellor was due to announce the results of the government’s consultation on pensions in the forthcoming Budget on 16 March. However, with less than two weeks to go, the Treasury has announced it is not the right time to proceed with changes to tax relief on pension contributions.

See our guide for help on How to review and manage your pension.

Following a consultation announced in the summer Budget, speculation had been mounting as to whether Mr Osborne would introduce a new flat rate of tax relief on contributions of between 25% and 33%, or a pensions Isa, which would have had a lower rate of tax relief on contributions but would pay out tax free.

Although leaving the system as it is was one option considered by the consultation, it was not the outcome anyone expected. Indeed only last month, Tom McPhail, leading pensions expert and head of retirement policy at Hargreaves Lansdown published probability ratings of the various options, with one being low and 10 close to certain – a reduction in tax relief for higher earners was given a 10, while leaving the situation as it is, was considered almost impossible with a rating of -437.

See Experts predict another watershed Budget for pensions for more on this.

‘Savers need a period of stability’

Steve Webb, former pensions minister and now director of policy at Royal London welcomes the U-turn. “Making major reforms simply to fill a short-term hole in the Chancellor's budget would have been totally unacceptable.  After nearly a year of uncertainty what savers need more than anything is a period of stability.  The Chancellor should now rule out any changes in tax relief at least for the rest of this Parliament".

However while higher rate taxpayers may have had a stay of execution, Fidelity is warning savers not to rule out any further changes.

Richard Parkin, head of pensions at Fidelity International says: “We expect this is action postponed rather than action abandoned. We should use this time to have a fuller and less hurried debate of how best to support long term pension saving. If we are to make changes then let us do that in a considered and orderly way rather than continuing the tinkering that adds complexity and undermines public confidence in the pension system.”

He adds: “We would still urge consumers to make the most of the current system while it is still in place – this is a postponement and not a cancellation of change.”

See Pensions rules explained for everything you need to know.

‘Plenty of wiggle room for changes in the Budget’

Mr McPhail, also warned that while Mr Osborne may not make any changes to the taxation of pensions in the Budget, there are other ways he can target retirement savings, for example by reducing the annual or lifetime allowance or restricting salary sacrifice.

“The nature of the briefings suggests that the Treasury would now find it very difficult to make any significant changes to pension taxation without suffering a significant dent to its credibility but there is still plenty of wriggle room for changes in the Budget.

“Given that the need to raise money hasn’t gone away, pensions must still represent a tempting target. This does look like a stay of execution and investors should still take advantage of higher rate relief while some certainty remains,” he says.

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