In his Budget speech on March 16th, George Osborne will announce the result of the Green Paper on Pension Reform. This could herald a final disembarkation from the tax relief powered gravy train that has driven retirement planning for the last few decades.
Since last year’s re-election, the Chancellor has already announced restriction of tax relief for those earning over £210,000 by limiting pension contributions to £10,000 pa and ratified a further reduction of the Lifetime Allowance to £1m.
The purpose of the latest pension review is purportedly to ensure that the current system of pension funding is both fair and sustainable. However, many pundits have speculated that it could just be another tax raid to try to shore up the finances of UK PLC.
It would be very easy for the report to conclude that the current system of tax relief is unfair – additional rate tax payers receive 45% tax relief on their pension contributions whereas basic rate taxpayers receive only 20%. It would also be easy to argue that the current cost of tax relief, which has doubled in the last 15 years and is estimated to be £35bn, is not sustainable.
If leaks are to be believed, the top option on the table is a new common savings account incorporating pensions and ISAs. This account would be funded post-tax but the proceeds taken tax-free as opposed to the current pension system whereby contributions are made pre-tax and then taxed on withdrawal. The Government would make a percentage contribution to the pot as they currently do with the help-to-buy ISA.
This change would remove higher and additional tax relief on pensions overnight and would probably bring an end to salary sacrifice arrangements which give relief on NI as well as Income Tax.
It would also create the opportunity to allow current pension holders to pay a one-off tax charge and switch their funds from taxable on exit to tax-free. This could be a significant revenue-raiser for the Treasury and it would be difficult for any Chancellor to resist such an opportunity.
So the message is loud and clear over the intercom – “All Change” - let’s hope that this is not a reference to what could be left in pensions after the Budget.