Pension tax consultation ‘costs Treasury £1.5bn’ in extra relief

Jenna Towler reports...

People scrambling to make additional pension contributions ahead of planned changes to tax relief rules have left the Treasury with an additional £1.5bn bill, according to AJ Bell.

The platform and self-invested personal pension provider said the government will now hand out an extra £1.5bn in additional pension tax relief despite scrapping its plans.

On Saturday, it was widely reported Chancellor George Osborne had abandoned plans to overhaul pension tax relief rules. He used his July Budget to launch a consultation on the issue and it was predicted he would use his upcoming 16 March speech to announce his intentions.

However, Treasury sources said over the weekend it was “not the right time” for widespread changes. Division among Tory MPs was reported in national papers as a key reason for the climb down.

Months of speculation on the issue seem now to be at an end.

AJ Bell said the prolonged speculation over the issue had seen millions flow into pension schemes as fears over proposed changes grew.

AB Bell chief executive Andy Bell said: “The government’s plan to reduce the cost of pension tax relief could have backfired spectacularly. Far from saving money, the uncertainty created by the consultation and scare stories from former ministers has led to a surge in pension contributions and there will be a heavy cost to this for the Treasury.”

He added: “This reaffirms 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.

“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.”

Trusting politicians to make significant policy decisions on pensions tax relief is like trusting a troop of foxes to babysit a brood of chickens

The Chancellor was considering a shift from exempt, exempt, taxed (EET) to a pension ISA system where contributions were taxed but investment growth and withdrawals were tax-free.

However, there was concern that the system could be changed by future governments leaving savers unsure about the safety of pension contributions.

Another widely trailed option was a move to flat-rate pension contribution tax relief of between 22% and 33%. This system would have given a boost to lower earners. At present, the system favours high earners and costs the government in the region of£30bn a year.

Moving to a flat-rate system would have given more encouragement to low earners to save more into a pension and cost the government less.

However, the Chancellor has decided to leave the system as it stands.

However, Hargreaves Lansdown head of retirement policy Tom McPhail said the policy could make a comeback.

“With uncertainties over auto-enrolment and the EU referendum, it appears the Chancellor has decided to put his plans on hold. Investors should look on this as no more than a stay of execution, though; with the amount of money involved, it would be optimistic to expect that the Chancellor will just leave pension tax relief untouched for the rest of this parliament.

“Anyone looking for certainty should take advantage of the current tax relief regime while it still exists.”

Zurich head of corporate funds proposition Martin Palmer said a pension ISA would have made the UK’s pensions crisis even worse.

Far from averting a retirement crisis, scrapping upfront tax relief would have pushed the country deeper into one

He said: “If the Chancellor had pressed ahead with plans for pension ISAs, it would have profoundly damaged retirement saving, auto-enrolment and the wider economy.

“Taxing pensions like ISAs would also have led to the instant loss of the tax-free lump sum for future savers, which our research shows could have caused a quarter (25%) of the working population to abandon pensions. A further 41% said they were unsure of whether of or not they would save into a pension.”

He added: “Far from averting a retirement crisis, scrapping upfront tax relief would have pushed the country deeper into one.

“Although we supported a generous flat rate as a fairer way to incentivise more people on lower incomes to save for retirement, the current system works well.

“It is now crucial that the government continues to build on the early success of auto-enrolment to encourage more new savers to enrol in workplace pensions.

“With thousands of workers due to come on board workplace schemes in the next three years, it is critical that auto-enrolment is given a chance to fully bed in.

“The government should ensure there is a sustained period of stability without further changes to pension tax relief so people have the certainty they need to make long-term decisions for their retirement.”