Experts Say Scheme Would Penalise Savers To Help Cut Deficit

Reports that George Osborne is to drop plans to introduce a flat rate of tax relief on pensions in this month’s Budget have surfaced.

Legal experts at law firm Irwin Mitchell have said the proposal would have penalised high earners in a bid to help cut UK plc’s debt.

Treasury sources have denied any final decisions on the proposals have been made ahead of the Budget on March 16. 

Savers currently receive relief on pension contributions at the highest rate they pay tax. 

Under one proposal being considered by Mr Osborne, a new flat rate of 25-30 per cent would be imposed, meaning that those who pay tax at 40 per cent or more would receive far less tax benefit from their pension contributions.

But after a series of detailed consultations the Chancellor is understood to be of the mind that removing higher rate tax relief from the middle classes would be a political and economic error.

There is also believed to be intense debate between Treasury officials over the creation of a so-called pensions ISA for youngsters new to the workforce. 

Contributors would have no tax relief on money paid in but would pay no tax several decades later when they begin to take their pension savings.

Expert Opinion

“The government seems to view pension pots as an easy target when it comes to reform as many will not feel the full consequences of any pension changes until years down the line.

“The worry is that the pension reform will make saving for later life through a pension scheme seem like a less attractive option. Pensions as such could gradually die out and be replaced with long term saving vehicles.

“The existing pension tax changes that we’re expecting on 6 April, such as the lifetime allowance reducing to £1m, and the introduction of the tapering annual allowance for higher earners will have a dramatic effect on the pension arrangements of those affected and may result in senior management losing interest in pensions as part of the overall remuneration package. Additionally the end of contracting out for defined benefit schemes that remain open to future accrual of benefits will increase both employers and employees pension costs and may well accelerate their closure.” Penny Cogher - Partner