Pensions could be taxed like ISAs as part of a fundamental reform of tax relief, chancellor George Osborne said in today’s UK Budget.
He announced a Green Paper that will consider whether to introduce pension contributions from taxed income, with “a top-up from the Government”, and tax free on exit.
“While we’ve taken important steps with our new single tier pension and generous new ISA, I am open to further radical change”, he said.
This idea, and others like it, need careful and public consideration, before any steps are taken, he added.
Less radical changes also on the table could include retaining the current system and altering the lifetime and annual allowances “as well as options in between”.
The Green Paper would “ask 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”, he said.
In early reaction, Malcolm McLean, senior consultant at Barnett Waddingham, said: “Bringing pensions and ISAs together under the same tax regime arrangements would be a major change and all the ramifications need to be carefully thought through.“
The change over from one system to another would require some fairly complex transitional arrangements: “It is good that the government is consulting on all of this and not making the mistake they made with the pension freedoms which were brought in hastily and without full consideration of all the issues that could arise.”
Phil Loney, chief executive of Royal London welcomed the Green Paper but cautioned that the outcome of the review should be a settlement to which all those involved in pensions can sign up and that “the resultant consensus will last a generation or more”.
He also questioned whether the proposals removed the need for a lifetime allowance “so no longer preventing people from using their pensions to save for the full range of later life needs, such as long term care and inheritance”.
“In the current climate where the arguments for tax relief at a saver’s marginal rate of tax have been largely lost a flat single rate of tax relief, around 33%, looks like a viable way to achieve a good balance. However the vast majority of tax relief still goes to savers in DB schemes and before decisions are made we must look at the impacts on these arrangements before a final settlement is reached”, he said.
Steven Cameron, regulatory strategy director at Aegon supported a review of the pension tax relief system “with a focus on simplicity and better engagement, encouraging greater long-term saving and personal responsibility for retirement objectives”.
“It’s important that the consultation takes into account the whole system of pensions tax relief, including lifetime and annual allowances for individuals, so they can plan their retirement with confidence”, he said.
