Insurers and fund managers have cheered the chancellor’s U-turn over pension tax relief, but have warned that he is merely postponing changes.
George Osborne has dropped a plan to scrap upfront relief, worth an estimated £21 billion to savers, after it was attacked by Baroness Altmann, the pensions minister and a former consumer campaigner, and other Conservatives.
Steve Webb, a former Liberal Democrat pensions minister and now director of policy at Royal London, said: “It is good news that plans to turn the pension system upside down have been dropped. Making major reforms simply to fill a short-term hole in the chancellor’s budget would have been totally unacceptable. After nearly a year of uncertainty, what savers need more than anything is a period of stability.”
Mr Osborne had been forecast to announce sweeping changes in the budget on March 16, but now is expected to keep the status quo. A pensions ISA was thought to be Mr Osborne’s favoured option. It would have given no tax relief on contributions, but withdrawals would have been made free of tax. The change would have given a short-term boost to public finances at the expense of lower revenue later.
Richard Parkin, head of pensions at Fidelity International, said: “The threat of radical change to pension tax relief appears to have receded for now, but the problems identified in the chancellor’s review and the subsequent national debate remain. We expect this is action postponed rather than action abandoned.”
Advertisement
Mr Osborne had considered various changes to the system. An ISA would increase savers’ freedoms, but would face heavy opposition from higher-rate taxpayers. That was unwelcome to some Conservatives, particularly at a time when Mr Osborne and David Cameron are trying to galvanise the support of their party ahead of the Brexit referendum in June.
There also were concerns in the insurance and fund management industries that a pensions ISA would lead to a drop-off in pension savings, as people would fear that a future government might reintroduce tax when the money was accessed, thereby taxing it twice.