Think tank raises fears about pension tax reform

Think tank raises fears about pension tax reform

The Institute for Fiscal Studies has said the Chancellor’s decision on pension taxation will have a “substantial” effect on the state of the UK’s public finances.

In its Green Budget - which looks at the challenges facing chancellor George Osborne as he prepares for his Budget - the IFS said proposals to change the pension tax relief system would have a wide-ranging effect on taxation.

HM Treasury has said Mr Osborne will announce the outcome of the consultation into the tax incentivisation of pension saving during his Budget on 16 March.

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Proposals under consideration include the introduction of a taxed-exempt-exempt system or the creation of a flat rate of pension tax relief.

The IFS report stated depending on which of the options is chosen, the effect on the headline public finances over the next five years could be substantial, but the true effect on the underlying and longer-term fiscal position may not be so easy to glean from the numbers that will be presented on Budget Day.

Exactly how much money each of these options would raise would depend on the behavioural impacts they would have, the IFS said.

For example, under a flat rate tax relief regime lower and middle-income individuals may or may not choose to save more while those on higher-incomes could save less, the IFS noted.

But the think tank also said uncertainty would stem from the sheer length of time between when someone starts a pension and when they start using it.

The IFS raised concerns that HM Treasury would use the money to cut taxes or boost spending in the short term rather than putting it in the bank.

The think tank stated: “But is it credible that the Chancellor or one of his successors – faced with a large surge in income tax revenues – would resist the temptation to give at least some of it away?

“In the longer term, when higher-income older people are enjoying their tax-free pension income, is it credible that a future, potentially cash-strapped, chancellor will avoid the temptation to levy tax again on this income?

“The first question suggests that future generations of taxpayers may not thank us if we allowed a chancellor to take the tax revenue up front and spend it.

“The second question suggests that we might ourselves be wary of putting much into our pension funds in case a future chancellor decides to tax us again.”