Late on Friday, the UK Treasury revealed to local media that Osborne had decided there would not be any changes to the current system of pensions tax relief at all in the next budget, due to be announced on 16 March.
“The nature of the briefings suggests that the Treasury would now find it very difficult to make any significant changes to pension taxation without suffering a significant dent to their credibility but there is still plenty of wriggle room for changes in the budget,” said Tom McPhail, head of retirement policy, Hargreaves Lansdown.
“We may see a further consultation paper in the budget, or we may simply get confirmation that plans have been put on hold. This does look like a stay of execution rather than a cancellation though,” he said.
Tax relief change out
The Financial Times had reported over the weekend that Osborne had always been cautious about doing anything that might damage pension saving. “He is not going to tear up the system of pension tax relief. There won’t be any changes to tax relief at all in the budget,” it quoted an ally of the chancellor as saying.
“He’s (Osborne) listened to what people have said and concluded that now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head,” the FT reported.
Andy Bell, chief executive of AJ Bell, said that despite the chancellor’s climb down on a radical overhaul of pension tax relief, there was still a danger that he could curtail the annual or lifetime allowances for pensions in next week’s budget.
“Don’t be surprised if the Chancellor plays the last card in his hand by tinkering with the income threshold at which pension tax relief starts to be curtailed. This could come down from £150,000 to £125,000 or even £100,000 and so, whilst higher rate tax relief would remain, it would be greatly restricted for many more people,” Bell said.
Hargreaves Lansdown’s McPhail said the government could still tinker with such things as the annual allowance for pension savings, which is currently set £40,000 ($56,700, €51,675), or the lifetime allowance, which is due to be cut £1.0m in April.
He might also restrict salary sacrificing in which pension contributions through an employer is exempt from the National Insurance tax, McPhail said.
Stability needed
Steve Webb, director of policy at Royal London, and an active campaigner against the mooted “Pensions Isa” reform that Osborne was believed to have been considering, welcomed the news that any major reforms in the budget had been scrapped.
“Making major reforms simply to fill a short-term hole in the chancellor’s budget would have been totally unacceptable,” he said.
After nearly a year of uncertainty what savers need more than anything is a period of stability. The chancellor should now rule out any changes in tax relief at least for the rest of this Parliament,” Webb said.
Jon Gwinnett, product technical manager at Nucleus Financial, an adviser-owned wrap platform, said the announcement showed the chancellor has listened to the views of the pensions minister and industry.
“We think it was the right thing because the removal of higher rate relief and the reforms were apparently being driven more by short term political requirements (deficit reduction) rather than a long term plan or vision.
“It would have disproportionately harmed the middle income families who frequently have the worst pension replacement rates and need encouraged to save more, not less.
“However, I don’t think we’ve heard the last of pension reform and I would regard change as shelved, rather than off the agenda,” Gwinnett said.
