Treasury rules out changes to pension tax

Treasury rules out changes to pension tax

The pensions industry has welcomed HM Treasury’s indication that it will not make drastic changes to the UK’s pension tax framework in the near term.

The government’s U-turn on increasing national insurance contributions for the self-employed sparked concerns that it could look to higher rate pension tax relief to fill the £2bn hole left in the Budget.

But HM Treasury has now indicated it would not make significant changes to the pension tax framework after a consultation last year determined that “now is not the right time”.

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Last month AJ Bell chief executive Andy Bell wrote to the government to urge policymakers to take a more measured, long-term approach to pensions tax policy, centred around an independent review of the pension tax system.

HM Treasury financial secretary Jane Ellison, responded to the letter with an assurance that now would not be an appropriate time to make changes to the pension tax system.

“As you are aware, an extensive consultation was conducted last year which considered changes to the pensions tax framework.

"This concluded that now is not the right time to undertake significant reform,” Ms Ellison said.

“Given this, the government does not think it is necessary to convene an independent pensions commission at this time.”

The comments indicate that any fundamental reform, such as a move to a flat rate of pension tax relief or a pension system that is more closely aligned with Isas, would be unlikely.

Andy Bell, chief executive at AJ Bell, said tinkering with pension tax relief has for too long been the “piggy bank” for chancellors in need of funding for new initiatives, which often leads to feverish speculation ahead of Budgets.

This creates a layer of uncertainty which could discourage people from saving, as the threat of future changes and removal of benefits undermines peoples’ confidence in the pension system.

“Ultimately, this complexity and uncertainty puts people off saving and is one of the main causes of the savings gap we have in the UK today.”

Mr Bell added the government would “seriously undermine its credibility” if it were to turn its attention back to higher rate pension tax relief.

Martin Tilley, director of technical services at Dentons, said he does not have a “great deal of faith” and suspects short term knee jerk reactions could continue to be the norm.

He said there have been “far too many ill-conceived and delivered short term solutions” on what should be a long term plan for pensions, not a tool for short term tax issues. 

“This needs a long term review with industry specialists involved and government haven’t got time for that now. Brexit is the main issue.

"For this reason we might have some short term respite but I’m expecting change soon,” Mr Tilley said.

David Trenner, technical director at Intelligent Pensions, said the last time government treated pensions as long term was in 1978 when the State Earnings Related Pension Scheme was introduced with cross party support.