There are growing concerns that millions of savers may no longer be able to take a tax-free cash lump from their pension if the Chancellor launches a ‘Pension ISA’ in this year’s Budget.
It is widely expected that there will be significant changes to the pension system this March – with either a ‘Pension ISA’ being introduced, or the Government abolishing higher-rate tax relief on pension contributions.
Both could signal the end of the perk that allows savers to access a quarter of their pension funds, tax-free from the age of 55.
Leading pension experts have slammed these proposals. Steve Webb, the former Liberal Democrat pensions minister - and now director of policy at Royal London - said these changes could be “the biggest example of daylight robbery since the days of Dick Turpin”.
The idea of a Pension ISA was floated in last year’s Budget. It would mean savers would lose all up-front tax relief on pension savings – significantly reducing the amount invested and future growth potential.
Webb added: “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.”
Flat-Rate Tax Relief
He was equally scathing about the introduction of a flat-rate of pension tax relief, unless this is set at a high limit. “If the Chancellor opts for a low flat-rate of tax relief (such as 25%) he will be stealing billions of pounds today from the support we give to hard-pressed savers.”
A Royal London report calculated that a flat rate of 25% would be a major disadvantage to higher-rate taxpayers, but would provide little benefit to lower earners. At this level the additional tax relief would be worth around £2 a week to basic-rate taxpayer, it said - not enough for a cup of coffee from a high street chain.
He isn’t the only one voicing concerns that further changes to the pension system could hit savers’ ability to provide for their future.
Attack On Pensions
Phil Wadsworth, director of JLT Employee Benefits said, “Pension ISAs are not the magic solution that George Osborne will have us believe. They are a much deeper assault on pensions that even Gordon Brown’s abolition of dividend tax credits.”
He added, “Pension taxation is a complex concept, which many people simply don’t understand. Pension ISAs sound attractive because of their simplicity but such a move to this style of system would immediately remove the huge benefit under the current tax regime of taking one quarter of your savings free of tax.”
He said this would effectively increase people’s future pension tax bill by a third.
Act Now To Protect Benefits
Steven Cameron, regulatory strategy director at Aegon said: “Rumours that the Chancellor is planning to remove the 25% tax free lump sum will be a concern for pension savers.”
He said this may be done through the introduction of a Pension ISA. But he added, “Another which has not received much attention is the Chancellor’s ability to keep the existing pension system as it, but simply withdraw or reduce tax-free cash. With the government looking for savings this would be a less radical change than the introduction of a pension ISA but would still benefit Treasury coffers.”
These rumours have fuelled a frenzy of activity, with many higher earners maximising pension contributions ahead of March, in order to ensure they get full tax relief on these savings.
This has led to reports that one leading figure in the pension industry planned to take his tax-free lump sum before March 16 – the date of the Budget.
However, such radical moves may be unnecessary: any pension change is unlikely to be retrospective, and funds accrued under the current pension system should be protected. However future contributions – via a Pension ISA or flat-rate system – may offer restricted benefits, which would effectively set up a two-tier pension system.
Wadsworth added, “People are still grappling with the substantial pension reforms of the last couple of years. There is a serious risk that further change will put them off saving for retirement altogether.”
