A broad-ranging consultation reviewing pensions tax relief has been announced, chancellor George Osborne has announced, reports sister publication Professional Pensions.
The consultation will examine whether there is a case for overhauling the current EET system of tax relief, where relief is given on contributions and investment income but the benefits on retirement are taxed.
The government said the key principles any reform should meet are:
- It should be simple and transparent. The government said it believes that greater simplicity and transparency may encourage greater engagement with pension saving and strengthen the incentive for individuals to save into a pension.
- It should allow individuals to take personal responsibility for ensuring they have adequate savings for retirement. It should encourage people to save enough during their working lives to meet their aspirations for a sufficient standard of living in retirement.
- It should build on the early success of automatic enrolment in encouraging new people to save more.
- It should be sustainable. Any proposal for reform should also be in line with the government’s long-term fiscal strategy
One option to be discussed includes bringing the treatment of pensions into line with those ISAs as revealed by Osborne in today’s summer Budget.
Centre for Policy Studies (CPS) fellow Michael Johnson has estimated that such a move could save the government £10bn a year.
Johnson previously branded tax relief on pension contributions as a “state subsidy” to the investment industry.
It is hoped the plans would create a sustainable pension system by encouraging people to save from a younger age, and by addressing improved life expectancies.
Osborne said: “Pensions could be taxed like ISAs. You pay in from taxed income – and its tax free when you take it out. And in-between it receives a top-up from the government.
“This idea, and others like it, need careful and public consideration before we take any steps. So I am today publishing a green paper that asks questions, invites views, and takes care not to pre-judge the answer.
“Our goal is clear: we want to move from an economy built on debt to an economy built on the more secure and productive foundations of saving and long term investment.”
JLT Employee Benefits chief actuary Hugh Nolan said: “We welcome any genuine consultation to put pensions onto sound footing for the future, recognising that it’s just one form of overall saving.
“There may be concerns about a hidden agenda or unintentional consequences with young people being particularly vulnerable to future changes in policy before they retire.”
But Talbot and Muir head of pensions technical Claire Trott raised concern the policy idea could actually discourage people from putting money into a pension.
She said: “Publication of a green paper to review pensions tax relief and taxation on income going forward should be welcomed.
“Any kind of consultation where the outcome isn’t already predetermined is a step forward from a government telling the industry how to run pensions when they don’t necessarily understand the implications.
“The implications of removing up front tax relief on pensions could be significant, removing the incentive for many to save. It will also add another regime to the many regimes we are already dealing with making pensions even more complicated when people come to access their benefits.”
The consultation can be read here.
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