Pensions tax relief decision delayed until 2016 Budget

The Chancellor will give the pensions industry his decision on tax relief changes in next year's Budget. Carmen Reichman reports...

Photo: Altogetherfool/Flickr CC BY-SA 2.0
Photo: Altogetherfool/Flickr CC BY-SA 2.0

The Treasury is to delay its decision on whether or not to change the way pensions are taxed until at least next year’s Budget, George Osborne said in the House of Commons.

The government launched a consultation on pensions taxation in July but said it will not respond to the work, which closed last month, until spring next year.

Responding to a question from Conservative MP for Gloucester Richard Graham about reform of pensions taxation, Osborne told the Commons on 27 October the government would “respond to that consultation fully” in the Budget.

The exact date for the 2016 Budget has not yet been set but it is likely to be in March.

A key part of the consultation was whether or not the government should change the current tax relief system from an upfront relief to an ‘ISA-style’ relief upon withdrawal.

The government also wanted to hear whether it should change the rate of taxation, from a tiered system to a flat rate of tax relief.

Advisers and providers united in their warnings against scrapping upfront relief, saying it would be detrimental to the government’s aim to incentivise consumer saving as the public won’t trust the system will last until they retire years down the line.

Some have now welcomed the delay in responding to the evidence gathered during the consultation process, saying it showed the government was taking a “measured approach” and could mean “big changes” are ahead.

Hargreaves Lansdown head of retirement policy Tom McPhail said: “The government’s decision not to respond to its consultation until next year is a reflection of the complexity of the pension tax system and the challenge in introducing any reforms. We welcome the fact that they are taking a measured approach rather than rushing at the problem.

“This is a mixed blessing for higher earners. A quick response would have meant no change.

“The fact that they want more time to work on it suggests they are still pursuing fundamental reforms; I believe these are likely to lead to cuts in the tax breaks offered to higher earners.”

AJ Bell head of technical resources Gareth James said: “Resolving the complexities of the various options by the Autumn Statement was always going to be a challenge so it is not surprising to hear that we’ll need to wait until next year’s Budget statement to find out more.

“The fact that he sees a need to consult on the government proposals through the mechanism of a Green Paper suggests change will be significant – why consult further if the proposals include only minor changes?

“It also means that they are not intending to introduce more changes without them being properly considered which should be welcomed by pension savers as well as the industry.”