Royal London’s Steve Webb has warned chancellor George Osborne’s March Budget could amount to “daylight robbery” if he replaces the current system with a pension Isa or a low flat-rate of tax relief.
In a hard-hitting report published today (23 February), Royal London warned against Mr Osborne implementing the dramatic changes he is expected to announce next month.
Former pensions minister Steve Webb, who is now director of policy at Royal London, said the March Budget could be “the biggest example of daylight robbery since the days of Dick Turpin”.
He said: “A pension Isa steals billions of pounds in tax revenues from the next generation who will need the money to fund the public services of an ageing society.
“If the chancellor opts for a low flat-rate of tax relief, he will be stealing billions of pounds today from the support we give to hard-pressed savers.”
By looking at the options for reform, the report called for the new system to provide stability and simplicity and stressed that it would be a “grave mistake” to slash the support available for savers.
The pension Isa was an idea floated by the chancellor in his July 2015 Budget, which would abolish up-front tax-relief.
Mr Webb said this would, in effect, be like the present government stealing funding from the next generation for the public services they will need as our society ages.
It has also been suggested Mr Osborne will offer a flat-rate relief, a system where everyone gets the same rate of top-up to their pension contributions regardless of their income.
The Royal London report pointed out a low flat rate, such as 25 per cent, would take billions of pounds out of support for long-term saving.
Royal London calculated a flat rate of 25 per cent would be worth little more than £2 per week extra for basic rate taxpayers and represent a major disincentive to pension saving for higher earners.
The report sets out some of the chancellor’s options for continuing with recent practice of making further detailed changes to the limits and structure of tax relief without fundamental reform.
Mr Webb argued this would be the “worst of all worlds”, creating yet more uncertainty and complexity and missing a once-in-a-generation chance to simplify the system.
He said: “We need a reform which helps savers and offers simplification and stability, such as a generous flat rate of up-front relief combined with the abolition of the lifetime limit on pension saving. Anything else would be a huge missed opportunity.”
Keith Churchouse, chartered financial planner at Guildford-based Chapters Financial, disagreed with the suggestion flat-rate relief would be daylight robbery.
“High-rate tax earners only account for a relatively small proportion of the UK public. I think it would be a great distribution of wealth across all areas and may encourage more people to save into pensions. However, those who are in a higher rate of tax are going to be very upset.”
Mr Churchouse said the time seems to be right for the chancellor to make changes.
He said: “It is quite clear this year that George Osborne certainly has some significant plans up his sleeve and I think we might be seeing to some extent the death of pensions in the Budget.
“Some of the legislation that is already coming through is highly restrictive on pensions and so many people are being switched off from saving in retirement.”
“If we were were to see radical changes - such as the loss of tax-free cash - then I agree that it would be the worst of all worlds.”
katherine.denham@ft.com
