Tax relief cut in new pensions revolution

THE Chancellor has paved the way for a second pensions revolution after announcing a review of tax breaks worth £ 34billion a year.

In a move that threatens to tear apart the current pension system, Mr Osborne said he was ‘ open to further radical change’.

He announced a consultation that could strip away the tax relief savers get when they pay in to a fund, possibly by transforming pensions into a type of retirement Isa – as well as cuts to the tax relief for top earners, to be brought in from next April.

It follows his pensions revolution in March 2015, when he announced that retiring savers would be able to use their nest eggs like a bank account.

The total bill for current levels of tax relief was £ 34.3billion in 2013/2014, with tax relief paid on contributions to pension pots based on the rate of income tax you pay – 20p, 40p or 45p. This means paying £1 into a pension scheme costs a basic-rate taxpayer 80p – a system criticised for being in favour of the top earners.

In a first step towards cutting back pensions tax relief for higher earners, Mr Osborne announced that from next April workers earning more than £150,000 a year will have the amount of tax relief they can receive on their pension savings scaled back.

At present they can get tax relief on contributions of up to £40,000 a year. But from April next year this allowance will be scaled back by £1 for every £2 earned over

‘This could be short sighted’

£150,000, until tax relief is limited to £10,000 of contributions.

Mr Osborne said the consultation would not ‘pre-judge any answers’ and changes would only be brought in after careful and public consultation.

The Government is understood to be looking at a number of options. These could include introducing a flat rate of tax relief, for example 30p for every £1 saved in to a pension. This would benefit lower earners, but reduce the relief for anyone in a higher tax band.

Another option is to treat them more like Isas. Mr 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.’

But experts warned this could stop workers from paying into their pensions because they must wait longer to see a boost to their savings. Claire Trott, of pension firm Talbot and Muir, said: ‘It is quite a short sighted move. People will be put off from saving if the Government removes upfront tax relief.’