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Chancellor George Osborne’s decision to shelve the planned overhaul of pension tax relief has been backed by much of the pensions industry.
Reports over the weekend confirmed Osborne will not push ahead with the pensions ISA or flat-rate pension tax relief reforms.
A Treasury source told the BBC it was “not the right time” to make changes. The Financial Times said backlash from Tory MPs was also a factor in the decision.
The government was considering making widespread changes to pension tax relief with an announcement expected in the Budget on 16 March. Last year, it released its Strengthening the incentive to save consultation on the issue asking for industry feedback.
A pension ISA – where contributions would have been taxed but withdrawals tax-free – was under consideration. As was a shift to a flat-rate tax relief system.
However, reports over the weekend revealed the reform package is now on hold.
The BBC said the decision followed warnings that a shift to ISA-style relief would have resulted in mass withdrawals from pension funds. However, some commentators backed making changes to the tax relief system which favours high earners.
The Association of British Insurers welcomed the stand down. Director general Huw Evans said: “We welcome the Chancellor’s sensible decision not to proceed with a pension ISA.
“Although we argued for a ‘savers’ bonus’ flat rate reform, the current system works well with auto-enrolment and delivers valuable incentives to save for retirement. We now need a period of stability to ensure confidence can grow and the benefits of auto-enrolment can be realised.
“There is still much to be done to help people understand pension tax incentives and we must all focus our efforts on raising awareness and using better language so tax relief does its job in encouraging people to save more for their retirement.”
We now need a period of stability to ensure confidence can grow
National IFA, pensions and employee benefits consultancy LEBC Group also backed the decision.
LEBC Group chief executive Jack McVitie said: “Following the significant reforms already implemented last year which have made pension savings more flexible at retirement and the successful and continuing expansion of provision through workplace it would be too ambitious to introduce further reform immediately.”
However, he added: “That said, we are keen to participate in further debate about how to extend access to long-term savings to a greater number of people and tax reforms may have a part to play in that.
“As the retirement planning adviser to thousands of employers and private individuals we are keen to extend access to advice to more individuals and are investing in both our staff and technology to achieve this.”
Royal London director of policy and ex-pensions minister Steve Webb said: “If press reports are correct, 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. The Chancellor should now rule out any changes in tax relief at least for the rest of this parliament”.
‘Stay of execution’
Hargreaves Lansdown head of retirement policy Tom McPhail warned the policy could make a comeback.
“There were two front-runners for fundamental reform: a pension ISA or a flat-rate scheme. The Chancellor is believed to favour the pension ISA but the idea met with widespread resistance from employers, investors and the pensions industry.
“By contrast, the flat-rate scheme would be more workable but perhaps wouldn’t have met the Chancellor’s ambition for truly radical reform.”
He added: “With uncertainties over auto-enrolment and the EU referendum, it appears the Chancellor has decided to put his plans on hold.
“Investors should look on this as no more than a stay of execution, though; with the amount of money involved, it would be optimistic to expect that the Chancellor will just leave pension tax relief untouched for the rest of this parliament.
“Anyone looking for certainty should take advantage of the current tax relief regime while it still exists.”
With the amount of money involved, it would be optimistic to expect that the Chancellor will just leave pension tax relief untouched for the rest of this parliament
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