Tax breaks on pensions are eye-wateringly expensive says Hammond

So what might be coming in Budget?

PHILIP Hammond has given his strongest signal yet that he is preparing to raid pension pots to fund extra health spending.

Speaking on a trip to Bali, the Chancellor said that tax breaks given to those saving for retirement had become ‘eyewateringly expensive’.

The comments fuelled speculation that he is planning yet another attack on pensions as he scrabbles for cash in this month’s Budget.

But critics said such a move would further undermine the savings culture.

Workers currently pay no tax on income they put into a pension pot.

Instead, they pay tax when the money is taken out in retirement.

This means it costs a basic rate taxpayer £80 to save £100 into their pension, a higher rate taxpayer £60, and a top rate payer £55.

The tax break – worth £39billion a year – is offered to encourage responsible saving by workers for later life and to ensure their income is not taxed twice. The Institute for Fiscal Studies think-tank has argued that ‘it’s not much of a relief – it’s merely tax deferred rather than tax saved’.

But the Chancellor is understood to be considering plans to reduce the amount that can be saved tax free to help pay for a pledge to increase health spending by £20billion a year.

Anyone earning less than £150,000 can currently save a maximum of £40,000 a year into their pension pot, tax free – the so-called annual allowance.

Mr Hammond could cut this to £30,000 or lower and bring the threshold down from £150,000 to £125,000. The annual allowance was cut from £255,000 to £40,000 by George Osborne. And the lifetime allowance – the amount that can be saved tax free over a lifetime – has been reduced from £1.8million to £1million. This is also under threat.

Mr Hammond said at the annual meeting of the International Monetary Fund in Indonesia: ‘My general feeling on pensions tax relief is that it is eye-wateringly expensive.

‘We spend a huge amount of money on pensions tax relief but of course for many reasons we want people to save and have resilience in older age.’

But former pensions minister Steve Webb, of investment manager Royal London, said: ‘Pensions should be a longterm business, and the constant short-term tinkering and speculation undermines confidence in long-term saving.’ Paul Johnson, director at the IFS think-tank, said: ‘If you didn’t give tax relief on contributions and continued to charge tax on pensions in payment that would quite simply constitute double taxation.’

Mr Hammond insisted he was a low-tax Tory despite figures showing the tax burden is heading to the highest level for 50 years on his watch.

He said that, while the deficit has fallen from £153billion under Labour in 2009-10 to less than £40billion last year, the Government has made some ‘very large commitments’ to areas such as the NHS that need funding. ‘I don’t like raising taxes,’ he said. ‘But I also don’t like out of control deficits. We have made some big spending commitments in line with what we know to be the public’s priorities.

‘The constraint is that I’m both a fiscal disciplinarian in that I expect to continue to focus on seeing debt fall as a percentage of GDP. I genuinely believe that lower taxes are good for the economy and good for our society.

‘But of course we have to do that in a way that is consistent with supporting good quality public services.’

Baroness Ros Altmann, a former pensions minister, said: ‘Ongoing tinkering salami slices away the benefits of pensions. We need a period of stability so people can plan.’