George Osborne plotting 4bn raid on pension savings, claims former minister

[TrueBlueTerrier]

http://www.ibtimes.co.uk/george-osborne ... mpaign=rss" onclick="window.open(this.href);return false;

Chancellor George Osborne could scrap the tax-free lump sum on retirement incomes in a bid to save the Treasury up to £4bn (€5.1bn; $5.7bn) annually, a former pensions minister has claimed. Liberal Democrat Steve Webb, who led pensions reform during the coalition years, said the "tax bombshell" could affect hundreds of thousands of Britons each year.

Writing in the Sunday Times, Webb said the chancellor was mulling abolishing tax breaks on pension contributions entirely in favour of an Isa-style system in which tax is paid up front. "It is remarkable to think that one of the most popular and best understood parts of the tax system – the tax-free lump sum – could be on the brink of extinction without anyone noticing," Webb wrote.

In the current system, people do not pay any tax up front on pension contributions and only pay tax when they take money out during retirement. A quarter of the pension pot can be accessed tax-free at the age of 55. In contrast, the tax on pension savings will have to be paid up front in an Isa-style system, meaning every penny withdrawn in retirement is already taxed.

'Double-dipping'

"To the chancellor, the big attraction of the 'pensions Isa' is that he suddenly gets a tax windfall," Webb observed. "For all of today's workers who would have been deferring tax on their earnings by putting their money into a pension, the tax has to be paid right now, as soon as it is earned.

"It is true that they will pay no tax when they retire, but that is the problem of a future chancellor. In a sense, Osborne would be double-dipping: benefiting both from the tax due on the pensions of today's retired population as well as the tax due on the earnings of today's workers, even though the latter are locking their money away in a pension."

The change could affect up to 20 million people of working age currently saving for later life, although pension pots already built up will be safe from the chopping block.

"While getting rid of the tax break on lump sums that have already been built up would be politically toxic, the Isa approach would stop people building up any more tax-free lump sums on future pension savings," Webb wrote. "Even for someone ten years away from pension age, this could have a big impact on their retirement planning."

[RobertT]

Scrapping the tax free lump sum is just one of the changes the Chancellor is supposedly considering. Although increases to that particular pension rule were introduced in both 2006 for schemes that didn’t previously allow 25% tax free and in 2015 for the pension pots of those that die before 75.
So personally I think a backwards step now would not make much sense.

Another option which Mr Osbourne is looking at is changing the level that tax relief on pension contributions is given. Currently basic rate tax payers get 20% relief, while higher rate get 40% and anyone earning over £150,000 gets 45%. As the majority of the annual tax relief bill goes to higher earners, it would make more financial sense to cut that.
There is talk of harmonising the rate for everybody at 25% or 30% which would actually benefit us: http://citywire.co.uk/money/pensions-ta ... ou/a747362" onclick="window.open(this.href);return false;

We’ll have to wait until the budget on 16th March to see what or if anything happens.

[jetblack]

Webb said the chancellor was mulling abolishing tax breaks on pension contributions entirely in favour of an Isa-style system in which tax is paid up front.

Its possible he'd do this - I wouldn't totally discount it - but on the balance of probabilities I'd say this is unlikely.

a) the current largest beneficiaries of the tax rules around pensions/pension contributions/tax free lump sums are the very people that vote for Mr. Osborne. They know (or employ people who know) the tax system inside out.

b) after all the rhetoric around encouraging people to save for their own retirement in the face of the ageing population etc, these proposals would be a step backwards and counter intuitive. These proposals would be taking away any incentive, certainly from a tax perspective at least, to saving for our old age - and they would be hard to justify in Parliament - in much the same way the Tax Credits changes were hard to justify.

Personally I would be in favour of the flat rate relief that Robert mentioned (ie. scrapping the 40% rate for high earners) - but again, would Osborne really go for this, given that its closing a loophole that the whole of the Cabinet is benefitting from ? I dunno. It would certainly be the most socially acceptable/just alternative.

It would be nice if, for once, austerity wasn't just for the peasants.

[toomuchcoke]

Scrapping the tax free lump sum is just one of the changes the Chancellor is supposedly considering. Although increases to that particular pension rule were introduced in both 2006 for schemes that didn’t previously allow 25% tax free and in 2015 for the pension pots of those that die before 75.
So personally I think a backwards step now would not make much sense.

Another option which Mr Osbourne is looking at is changing the level that tax relief on pension contributions is given. Currently basic rate tax payers get 20% relief, while higher rate get 40% and anyone earning over £150,000 gets 45%. As the majority of the annual tax relief bill goes to higher earners, it would make more financial sense to cut that.
There is talk of harmonising the rate for everybody at 25% or 30% which would actually benefit us: http://citywire.co.uk/money/pensions-ta ... ou/a747362" onclick="window.open(this.href);return false;

We’ll have to wait until the budget on 16th March to see what or if anything happens.

I doubt they'd go for eliminating the 25% lump sum one fell swoop when/if they do go for it. They would, IMHO, be more likely to either reduce it to 20% (and later on reduce it still further) and/or cap the maximum amount you could withdraw tax free. In the latter case, they'd be sure not to uplift the limit and if anything reduce it later on. (Indeed, if they did introduce a limit then it would then be easy for a future Labour government when/if such occurs to reduce said limit.)

[toomuchcoke]

We’ll have to wait until the budget on 16th March to see what or if anything happens.

I doubt they'd go for eliminating the 25% lump sum one fell swoop when/if they do go for it. They would, IMHO, be more likely to either reduce it to 20% (and later on reduce it still further) and/or cap the maximum amount you could withdraw tax free. In the latter case, they'd be sure not to uplift the limit and if anything reduce it later on. (Indeed, if they did introduce a limit then it would then be easy for a future Labour government when/if such occurs to reduce said limit.)

Just wanted to add, whilst the idea that a chancellor might decide to axe or at least modify the 25% Pension Commencement Lump Sum (they officially renamed it a few years back IIRC?) has been knocking around for a while there seems to have been an awful lot of media attention to it this year. So my thinking is that either (private/company) pensions are going to get modified (again) and they're softening us up by talking about all sorts of possibilities or pensions are safe (this time around) and they're distracting attention from what they really want to do ...