Chancellor George Osborne has dropped plans to overhaul pension tax relief in next week’s Budget, with one estimate putting the cost to HM Treasury of the aborted shake-up at £1.5bn.
In a widely reported climb down, a Treasury source said it was “not the right time” to make proposed changes that could have encouraged lower earners to save more for retirement, after Mr Osborne faced heavy criticism from some Conservative MPs and parts of the pension industry.
Self-invested pension provider AJ Bell has estimated uncertainty created by the floated plans has cost HM Treasury £1.5bn in additional pension tax relief, as savers poured billions of pounds into pensions in fear of reliefs being curtailed or abolished.
Andy Bell, chief executive of AJ Bell, said: “This re-affirms my long held view that trusting politicians to make significant policy decisions on pensions tax relief is like trusting a troop of foxes to babysit a brood of chickens.”
Two alternatives to the current system of upfront tax relief at savers’ marginal rate were being considered under the mooted plans.
Upfront relief would have been scrapped in favour of a ‘Pension Isa’ with tax-free pension withdrawals from aged 55, or a new flat rate of tax relief introduced, which would have helped those earning less than average and hit the wealthier core of Tory voters.
Mr Bell said the pension saving public would be better served by an independent Pension Commission with a mandate to manage UK pension policy and “provide certainty and confidence to savers”.
National IFA, pensions and employee benefits consultancy, the LEBC Group, welcomed an end to the speculation about changes to pensions in this year’s Budget, branding the plans “ambitious” given the industry was still dealing with the introduction of pension freedoms last April.
But Jack McVitie, chief executive of LEBC, said he hoped the government would revisit ways to get more people saving towards a pension.
He said: “We are keen to participate in further debate about how to extend access to long term savings to a greater number of people and tax reforms may have a part to play in that.”
Former JP Morgan investment banker Michael Johnson has branded higher rate tax relief on pensions an “utterly ineffective use of taxpayers’ funds”.
In a note for think tank the Centre for Policy Studies, written before reports of the chancellor’s u-turn emerged, he said:“[Post-pensions freedoms] the Treasury is exposed to an unaffordable tax arbitrage.
“Those approaching the age of 55 flip existing savings into pension pots to collect tax relief, only to then take out the 25 per cent tax-free lump sum at 55 and draw down the other 75 per cent in a controlled manner, over time, thereby minimising their tax liability.