True cost of Osborne’s pension raid
Middle-class savers will need to find an extra £4,000 a year if tax relief on nest eggs is slashed
MONEY MAIL can today lay bare the devastating full impact of George Osborne’s plot to raid middle- income savers’ pensions.
For the first time, we can reveal how the Chancellor’s plan to scrap tax breaks on pensions will leave a black hole in the nest eggs of up to four million workers.
If Mr Osborne axes the perks in the Budget next month, it will leave savers facing a hard choice if they want to keep their retirement dreams on track.
They will either have to work into their 70s to plug the gap or scrape together hundreds of pounds extra to put aside for retirement every month.
In the most extreme cases a 35-yearold earning £45,000 would have to pay in an extra £4,140 a year into their pension to build up the same retirement fund at the same rate as today.
The alternative would be sticking with saving the same amount as they do today and working for another seven years, until they are 72.
At present, basic-rate taxpayers receive a £20 top-up from the Government for every £80 they pay into a pension. Those earning more than £42,385 receive £40 for every £60, while top-rate taxpayers receive £45 for every £55.
Under plans being considered by the Government, this system stands to be scrapped and replaced with one of a number of options.
These include a flat rate of between 20 pc and 30 pc. A 20 pc rate means all savers would have to put £80 into a pension to get a £20 top-up — no matter how much they earn. If the rate was 25 pc they would need to save £75 to get an extra £25 from the Government.
There are now just four weeks until Chancellor announces whether he will slash the £34.3 billion tax relief bill.
Our campaign to stop Mr Osborne wrecking the retirement plans of millions of savers has won the backing of influential economists, politicians and business leaders.
These include the Institute for Fiscal Studies. Its director Paul Johnson warns: ‘ Pensions must not be treated as a cash cow by the Treasury — they are vitally important to Britain’s long-term prosperity.’
Senior Tory MPs have also called on the Chancellor to rethink his plans, fearing it could cost the party votes at the next election.
Backbenchers have warned of a ‘riot’ if the cuts to pension savings go ahead and claim Mr Osborne can forget his chances of succeeding David Cameron as Prime Minister.
Mark Garnier, a Tory MP on the Treasury select committee, condemned the plans as ‘a war of attrition on higher earners’.
Jacob Rees-Mogg, Conservative MP for North East Somerset, railed against plans to remove perks from higher-rate taxpayers, calling them ‘basically socialism’.
Meanwhile, the Association of British Insurers has warned against ‘reckless and highly risky’ proposals that would create a timebomb for future generations.
Tom McPhail, head of retirement policy at FTSE 100 firm Hargreaves Lansdown, said ‘ any steps’ to reduce the tax breaks on pensions today could have ‘disastrous consequences in the years to come’.
A move to a flat-rate system might be marketed by the Government as a boost to basicrate taxpayers as they might receive more than under the current system.
But Mr Rees-Mogg describes it a ‘socialist’ policy. He says: ‘What is suggested is giving one set of people another set of people’s money.’
Our figures, prepared by actuarial firm Barnett Waddingham, reveal how middle-income workers would face the greatest struggle of all those affected by the changes.
A 35-year- old earning £45,000 a year would have to pile an extra £1,776 a year, or £148 a month, into their pension with a 25 pc flat rate to make up the difference.
That’s assuming their pot grew at a rate of 5 pc and they bought an annuity income that would provide payouts worth two-thirds of their current earnings.
Alternatively, they could continue working for two-and-a-half years longer to the age of 67-and-a-half and pay in the same amount.
Another option open to the Chancellor is to completely reverse the current system and introduce something a bit like an Isa.
This would involve removing tax relief altogether but allowing savers to make tax-free withdrawals when they retire.
Savers may be given a top-up by the Government worth a proportion of their current contribution but this is not guaranteed.
Civil servants and the Chancellor are understood to be attracted by the flexibility of what is being called a ‘pensions Isa’.
But Money Mail has uncovered the full extent to which such a system would ravage savers’ nest eggs.
Without a top up, the same saver would have to stash an eye-watering £345 a month (that’s £4,140 a year) into their pensions — meaning they would have to pay in £936 a month in total in every single month over the next twoand-a-half decades.
Alternatively, they face being forced to work for another seven years — retiring at 72.
Things barely improve with the 10 pc government top-up experts have suggested. The worker would have to toil for another five-and-ahalf years or pay in an extra £246 a month into their pension.
Experts fear that the additional burden on savers’ shoulders could mean many abandon putting cash into their nest eggs altogether.
Former pensions minister Steve Webb, who now works as a policy expert at insurer Royal London, said: ‘If at the end of the Budget people feel it is not worth saving into a pension or are just too frightened to do so they might well give up.
‘If you take a large amount of cash out of tax relief it makes it even harder for many to achieve the retirement they want.’
A Treasury spokesman says: ‘The Government launched a consultation into pensions tax relief last summer.
‘We are considering all options, including retaining the current system. This consultation is now closed and we will respond at the Budget.’