Former pensions minister Steve Webb is set to compare chancellor George Osborne’s suggestions around a move towards taxing pensions like Isas to former chancellor Gordon Brown’s notorious tax raid on occupational pension schemes.
Speaking at the Association of Consulting Actuaries’ annual conference later today (5 February), Royal London’s director of policy, is set to comment: “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.”
Mr Webb conceded abolishing tax relief on pension contributions would certainly raise large sums, even if some of the proceeds were given back as a government top-up into pension pots.
But he pointed out the damage done to pension saving would be “incalculable”, as pensions are once again seen as a convenient pot for cash-strapped chancellors.
“Just at the point that millions more people are starting to save through automatic enrolment, upheaval in the tax treatment of pensions is the last thing we need.”
Mr Osborne is due to announce policy changes at the Budget in March, following a Green Paper launched at last year’s summer Budget.
The consultation contained a few main proposals for reforming pension tax relief, along with the option of sticking with the status quo.
The most controversial was the chancellor’s suggestion that “pensions could be taxed like Isas”, explaining: “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.”
More recently though, the other main alternative - to opt for a flat rate of tax relief - appeared to receive the Treasury’s backing.
Currently workers enjoy pension tax relief at the same rate as their income tax, but the change would see a shift towards a pension savings incentive of between 25 and 33 per cent for everyone, people close to the government were reported to have revealed.
Regardless, Mr Webb used the platform to warn against the so-called ‘Pensions Isa’, highlighting problems such as:
|Pension Isa drawbacks|
The need for pension schemes and providers to run parallel pension accounts for each individual for decades to come, one with tax already taken out and one yet to be taxed;
|If pensions in payment are tax free, the ‘Lamborghini risk’ will be exacerbated. At present, withdrawals from pensions are taxed, which acts as a brake on withdrawals, but if they were tax free there would be much less incentive to spread withdrawals over a number of years;|
|Taxing pensions up-front effectively brings forward tax revenues from future generations; yet it is future generations who will face the biggest bills for pensions, health care and social care;|
|Confidence in pension saving among employees and employers would be further damaged. If government contribution to pensions was simply a top-up to taxed contributions, this would simply be another element of the system which chancellors could tinker with from year to year.|