Changes to tax relief on pensions could create problems in the future

Milsted Langdon’s Financial Services Partner, Steve Horton, has commented on news that the Chancellor is potentially planning to replace all tax relief on pensions in favour of an ISA-type system with tax paid in advance. According to former pensions minister Steve Webb, rules allowing savers to withdraw 25 per cent of a pension pot tax-free in a lump sum when they reach the age of 55 could be scrapped for any such new pension arrangements.

Mr. Horton suggests that more commentators are predicting a flat rate of pension tax relief will be introduced at the next Budget and stated that Mr. Webb’s prediction would be an “astonishing change” if it were to be introduced.

Webb commented: “I do not believe that the flat rate was ever the Treasury’s first preference,” adding that the ISA approach would mean “an extra tax bombshell” that “seems to have gone almost completely unnoticed.”

He adds: “Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free – a hugely tax-advantaged way of saving. In effect, a quarter of the money in your pension never gets taxed at all under the current rules. But with a pensions ISA, this tax break quietly disappears. Since all of the money that goes in to a pensions ISA has already been taxed, there is no equivalent of the tax-free lump sum.

“Given that the tax-free lump sum costs the Chancellor around £4 billion per year in lost revenue, it is easy to see why he might like to get rid of it. It is remarkable to think that one of the most popular and best understood parts of the tax system – the tax-free lump sum – could be on the brink of extinction without anyone noticing.”

Meanwhile, a flat rate of pension tax relief would mean all taxpayers receive the same level of tax relief however much they earn. “If it were set at 25 per cent or 33 per cent – that is higher than the basic rate and lower than the higher rate – pensions would actually become more attractive to low and modest earners as the Government would be giving a bigger boost every time a basic rate or non-taxpayer pays into their pension,” stated Steve Horton.

Whatever measures are introduced in the Budget are likely to place some restriction on the tax relief given for pension contributions. Clients would be well advised to pay money into pensions now to benefit from full tax relief whilst this continues to be available.

The Chancellor is set to deliver the Government’s next Budget on 16 March and Milsted Langdon’s experts will be available to advise clients on how the changes affect them.

As Head of Milsted Langdon Financial Services Limited, Steve Horton is supported by a strong team of specialists that are able to offer a wide range of advice to companies and individuals.

Posted in Press Releases.