GEORGE OSBORNE has been basking in the glow of his new “pension freedoms” that came into play earlier this year.
The chancellor wasn’t finished with his “pensions revolution” declared at the July budget. “Pensions could be taxed like ISAs,” announced Osborne during his House of Commons speech.
“You pay in from taxed income – and it is tax-free when you take it out. And in between it receives a top-up from the government.”
Osborne went on to announce a three-month consultation on the future of tax relief on pension contributions. This relief annually costs the Treasury £25 billion – about half the UK’s annual deficit!
It’s clear to see Osborne’s target. More than two thirds of the relief goes on higher and top-rate taxpayers. They save at least £1 in their pension pot for every 60p they contribute. Around five million of this country’s best-paid people benefit by around £5,000 on average annually.
As Mr Osborne had promised no increases in income tax, national insurance or VAT during this parliament in the lead-up to May’s General Election, his options for raising or saving money had to extend beyond the normal “easy” targets.
It will be very interesting to see how Osborne reacts to the public consultation regarding pensions. There are two messages already coming through loud and clear from a new survey about the chancellor’s proposals.
The first is the perennial plea from the public regarding tax regimes – a more straightforward system; keep it simple. Even those who may lose out with a flat-rate tax relief scheme support this view.
Secondly, was a big thumb’s down to Osborne’s proposal to create a PISA – a Pension Individual Savings Account. The popular view was that savers would not put money in a pension ISA wrapper with cash that had already been taxed. The fact that the government would add to those savings did not win the doubters over.
The frequent changes to pension regulations and the attitude of different governments towards savers has led many to be suspicious; what they originally sign up for often vanishes or is drastically revised in the years and decades ahead.
Don’t forget, pensions are probably the longest-term investment we make.
Almost half the savers said they would either stop contributing to a pension or reduce their savings if Osborne goes head with the PISA proposal. Only 20% said that an ISA pension would make them save more.
While the traditional ISA may not receive a “top-up from the Government” as the chancellor described it, those savings are accessible at any time and any age.
Osborne has already gone back on one of his Coalition March Budget promises, which was to make the cash ISA more flexible. He announced that savers would have “complete freedom to take money out and put it back later in the year, without losing any of their tax-free entitlement.”
This new freedom was to have been introduced from the autumn after consultation with ISA providers. Now it has been put on hold until next April 6th, the start of the 2016-17 tax year. This delay was detailed on page 86 of the Treasury’s 123-page Summer Budget (July) document – but has only now been made public.
These late changes show the benefit of consulting an Independent Financial Adviser (IFA) before making any decision regarding your investments, if only to confirm that the chancellor is as good as his word.
Which he is regarding the Help-to-Buy ISA, which was also announced in March Budget. This still starts on 1st December.
The scheme, which applies to homes of £250,000 (£450,000 in London), allows those wanting to buy their first property to save up to £200 a month (the account can be started with £1,000) and the government will add a 25% bonus when those savings are used as a deposit.
The most interesting consequence of the pension’s public consultation and the chancellor deliberations will be what happens with pension’s tax relief.
The new pension’s minister, Ros Altmann, is said to favour the single-rate system. For the saver, it has the merit of being simple with little scope for future Treasury fiddling about.
The single-rate idea was proposed earlier this year by Steve Webb, at the time, the Coalition’s pension’s minister. The rate he suggested was 33% – basically for every £2 saved, the government would add £1.
Mr Webb lost seat at the General Election, and with it his role as the longest-ever serving pension’s minister.
His status as the real hero of the recent pension’s reforms, which have included removing the obligation to buy an annuity with your pension pot, would be secured if the single-rate relief proposal finds favour with the chancellor and becomes the latest pension change.
Around 80% want the pensions tax-relief system simplified; and 60% thought the £2 for £1 (or 33% relief) would encourage greater retirement savings.
That hopefully is George Osborne’s ultimate aim in this public consultation. Even 40% of higher taxpayers, who would be worse off, were in favour of tax relief at 33%.
The consultation publishes its findings next month; changes to the pension system could be announced in the chancellor’s autumn statement, which will be made in late November or early December.
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