Expect the unexpected from Osborne’s next Budget

Significant changes are forecast; however, the surprise announcement of the pension freedoms has taught us to expect the unexpected from George Osborne’s Budgets. Nonetheless, it looks virtually certain that a flat rate of pension tax relief of between 25 per cent and 33 per cent will be introduced with immediate effect in March.

This would be great news for basic-rate taxpayers and bad news for higher-rate taxpayers, especially coming on top of the ridiculous and overly restrictive limits on contributions and total fund size. If a basic rate of tax relief or government bonus is to be applied, which personally I have argued in favour of for more than 30 years, I believe it is essential that at the same time the Chancellor gets rid of these petty-minded and unnecessary restrictions on larger funds.

I believe it is essential that the Chancellor gets rid of these petty-minded restrictions on larger funds.

For financial advisers, the reality is higher earners need to contribute all they can over the next six weeks, while most ordinary taxpayers should probably wait until after the Budget to see what the new basic rate is.

David Gauke, the Financial Secretary to the Treasury, stated: “Nobody wants to punish anybody,” and indeed, if these changes happen, they will create a more level playing field. Personally, not only do I agree with Mr Gauke, but I also urge him to ensure that this same principle of fairness is applied to the urgently needed reform of the funding of the FSCS.

A further benefit of a flat rate of pension tax relief is that it will be much more straightforward to explain to potential clients who, frankly, find the whole subject of pensions boring. Pensions are a hugely complex subject, and anything which helps to simplify them will be beneficial to consumers and professionals alike.

An example of how simplification can work in practice is auto-enrolment (AE), which has so far proved a ‘success’, with current opt-out rates standing at around 12 per cent, though this still has to be tested when the higher contribution rates kick in.

Auto-enrolment itself is not at all simple for advisers or employers, but for the employees it could not be simpler – unless they take direct action to opt-out, they are in. I believe simplicity is vital if we are to increase the number of people saving enough for their retirement to ultimately build a fund which is sufficient to provide for them in later life.

Ken Davy is chairman of Simplybiz Group