Is Osborne about to drop a tax bombshell on pensions?
Written by Paul Dodd on February 26, 2016.
The UK government was extremely vocal last year about their so-called ‘pensions revolution’ which gave retirees the freedom to do whatever they liked with their savings rather than obliging them to purchase an annuity. On reaching the age of 55 savers currently face no restrictions on how and when their pension can be accessed. In addition, tax relief applies on the first 25% of any lump sum taken (or indeed on smaller drawdown amounts taken at intervals), a perk which effectively means that because pension contributions and growth are also subject to tax relief, a quarter of pension savings are entirely tax free.
But that is all set to change if media speculation is anything to go by. The government is being rather more tight-lipped about possible changes to the current system in the upcoming budget but Steve Webb, the former Pensions Minister who worked closely with the Chancellor, George Osborne, on current legislation, claimed in an article in The Sunday Times that the 25% tax-free lump sum pension perk will be abolished by Osborne next month in a move to claw back £4bn in lost revenue.
Webb, who lost his seat in May 2015 and now works for pension provider, Royal London, believes that the government will scrap the current arrangement and replace it with an Isa-style system in which contributions are taxed upfront when paid into a pension fund. Although no tax would be payable when the money is taken out (although for how long is anyone’s guess), this kind of system is far less generous than the present one.
Before you panic and rush to cash in your pension and benefit from your tax-free lump sum before March’s budget, Webb believes that existing pensions will continue to operate as they do presently with any changes applying only to future savings.
Of course this is just one rumour currently circulating about pension reforms to be announced in the Budget. Another theory is that changes are afoot to shift from the current system of pension tax relief towards a single, flat-rate relief of between 25 and 33%. This would benefit lower earners but punish those higher earners who currently receive between 40 and 45% tax relief on pensions contributions. Needless to say, the government coffers would benefit from the flat-rate.
In reality, none of us know for sure what budgetary changes the Chancellor will announce on 16th March. Nevertheless, some experts are suggesting that higher earners looking to pay into a pension do this before March 16th and lower earners might be better holding off until after that date.
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