Chancellor forced into u-turn

Osborne abandons pensions tax relief shake-up

George Osborne Commons 2Chancellor George Osborne has abandoned his proposals for further pension reforms after being warned of a backlash from middle class voters.

His most radical plans were to reduce tax relief for higher earners and the introduction of a “pensions ISA”.

He had planned to make the changes in the forthcoming Budget but Whitehall insiders now say there will be no change to tax relief.

The plans sparked fears of a Northern Rock style run on pensions with thousands of retirees cashing in their savings pots.

Baroness Altmann, the pensions minister, is said to have added her own concerns.

One source said the Chancellor “is not going to tear up the system of pension tax relief. There won’t be any changes to tax relief at all in the Budget.”

One option under consideration had been to replace the current tiered tax system with a flat rate of pension tax relief, which could have benefited basic rate taxpayers, but penalised higher earners.

The pensions ISA would have completed the Chancellor’s desire to give retirees control over their retirement savings, and would have removed upfront tax relief on contributions for all.

This would have come with a guarantee that the whole pension pot could be drawn down tax-free on retirement.

Last year he introduced greater freedoms, allowing retirees to more control over their pension savings and removing the obligation to buy an annuity.

His latest proposals have been met with huge resistance. Numerous figures in the industry, including Royal London chief executive Phil Loney, have spoken out against the ISA plan. Former pensions minister Steve Webb, now working for Royal London, also opposed the idea.

Such proposals have sprung out of frustration in the Treasury that tax allowances on pensions are denying it of up to £50bn in revenue.

While Mr Osborne has formally ruled out cutting tax relief, he could still cut the lifetime allowance on retirement savings further.

Joanne Segars, chief executive, Pensions and Lifetime Savings, said: “We’ll have to wait for the Budget on 16 March to get the full details but if the Chancellor has indeed decided not to meddle with tax relief on pensions he is to be applauded.

“Tax relief plays an essential part in encouraging people to save for their retirement and any change to the pension tax system would without doubt disadvantage savers of all incomes.  No change to pension tax relief on Budget day will be the right decision.”

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