In today’s (8 July) Budget it was announced that further radical reforms of the pensions system could be underway, with the implication that pensions contributions would no longer be tax free, but withdrawals would be.
Chancellor George Osborne said he was “open to further radical change” of pensions, while announcing a green paper to consult on further changes.
“Pensions could be taxed like Isas. You pay in from taxed income – and its tax free when you take it out – in-between it receives a top-up from the government.
“This idea, and others like it, need careful and public consideration before we take any steps,” he continued, adding that the goal is to move from an economy built on debt to an economy built on the more secure and productive foundations of saving and long term investment.
The policy paper went into further detail, explaining that the government wants to make sure the right incentives are in place to encourage saving into pension in the long term.
“The government is therefore consulting on whether there is a case for reforming pensions tax relief to strengthen incentives to save, offering savers greater simplicity and transparency, or whether it would be best to keep the current system,” it stated.
The document said that the government is interested in views on the various options that have been suggested for how the system could be reformed.
“These range from a fundamental reform of the system (for example moving to a system which is ‘taxed-exempt-exempt’ like Isas and providing a government top-up on pension contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between.”
It added that any reform to pensions tax relief would build on the reforms to the pension and savings tax systems announced in the last Parliament, which the government said have already given individuals greater freedoms with their money and flexibility over how they hold their savings.
Claire Trott, head of pensions technical at Talbot and Muir, welcomed any kind of consultation where the outcome was not already predetermined.
“The implications of removing up front tax relief on pensions could be significant, removing the incentive for many to save, it will also add another regime to the many regimes we are already dealing with making pensions even more complicated when people come to access their benefits.”
However for Andrew Pennie, marketing director at Intelligent Pensions, the news of such a consultation was bad.
“Changes to pensions tax relief is bad news for pensions and pension savers. Higher earners get a larger amount of tax relief only because they pay a higher amount of tax and because they can afford to save more.
He said that although this move could represent a considerable tax intake for the government, it would be bad news for pensions and pension savers.
“It would mean additional costs for employers and providers in segregating ‘old’ and ‘new’ type pensions, adding to costs, and for occupational pension schemes, risking cuts to the vital employer contributions.