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George Osborne pressed for guarantee to avoid pensions tax relief changes

Published 05/03/2016

The Chancellor had been reportedly considering unveiling plans to make pensions more like Isas in the Budget on March 16
The Chancellor had been reportedly considering unveiling plans to make pensions more like Isas in the Budget on March 16

George Osborne has been urged to give savers a guarantee that there will be no changes to pensions tax relief until at least 2020.

The Chancellor abandoned plans for a raid on tax relief in this month's budget following stark warnings from experts and resistance from Tory MPs.

But analysts fear the Chancellor has only postponed the changes and called for a period of stability before any further reforms are made.

The Chancellor had been reportedly considering unveiling plans to make pensions more like Isas in the Budget on March 16.

He was also thought to be looking at an alternative option of setting a flat rate of tax relief - something which many Tories feared would have been unpopular with higher earners who would lose their more generous entitlement.

An Isa-style system would have removed the up-front tax relief on contributions, but allowed withdrawals to be made tax-free instead.

But doing so would have reduced the incentive to save and could have meant people felt less inclined to keep their money in their pot.

A Treasury source confirmed Mr Osborne had ditched the idea of making changes because he had "always been clear he would not do anything to damage saving".

The proposals had also faced resistance from Tory MPs and It is understood that there will not now be changes to pension tax relief in the Budget.

The pension system has already undergone a huge series of shake-ups in recent years, with the introduction of automatic enrolment into workplace pensions in 2012, and the pension freedoms launched in 2015 which allow people aged 55 and over to take their savings pots how they wish, rather than being required to buy an annuity retirement income.

Former pensions minister Steve Webb welcomed the Chancellor's decision but called on him to guarantee there would be no changes on tax relief until at least 2020.

The Liberal Democrat, now director of policy for Royal London, said he backed a fair flat rate but now was not the time for further upheaval.

He told the BBC: "There is a case for reform, for giving everybody the same generous rate of relief.

"One of the worries was that the Chancellor wouldn't just take the existing pot and just reallocate it but he would take billions out - there really are tens of billions of pounds at stake in tax relief.

"Given that we are actually not saving enough, we need more help to save for our pensions, one of the big fears was that this would all be about the hole in the budget not about promoting long-term saving."

He added: "My plea to the Chancellor would be, on Budget day, tell us you are leaving it alone at least for a parliament so people can actually plan for the long term."

Association of British Insurers (ABI) director general Huw Evans said: "We welcome the Chancellor's sensible decision not to proceed with a Pension Isa.

"Although we argued for a 'savers' bonus' flat rate reform, the current system works well with auto enrolment and delivers valuable incentives to save for retirement.

"We now need a period of stability to ensure confidence can grow and the benefits of auto enrolment can be realised.

"There is still much to be done to help people understand pension tax incentives and we must all focus our efforts on raising awareness and using better language so tax relief does its job in encouraging people to save more for their retirement."

Richard Parkin, head of pensions at investment firm Fidelity International, said: "The threat of radical change to pension tax relief appears to have receded for now but the problems identified in the Chancellor's review and the subsequent national debate remain.

"We expect this is action postponed rather than action abandoned.

"We should use this time to have a fuller and less hurried debate of how best to support long term pension saving. We already have changes coming into effect for higher earners in April that are causing significant disruption and we urge the Chancellor not to fiddle with the system further.

"If we are to make changes then let us do that in a considered and orderly way rather than continuing the tinkering that adds complexity and undermines public confidence in the pension system.

"We would still urge consumers to make the most of the current system while it is still in place - this is a postponement and not a cancellation of change."

Tom McPhail, head of retirement policy at Hargreaves Lansdown said: "There were two front-runners for fundamental reform: a pension Isa or a flat rate scheme.

"The Chancellor is believed to favour the Pension Isa but the idea met with widespread resistance from employers, investors and the pensions industry.

"By contrast, the flat rate scheme would be more workable but perhaps wouldn't have met the Chancellor's ambition for truly radical reform.

"With uncertainties over auto-enrolment and the EU referendum, it appears the Chancellor has decided to put his plans on hold.

"Investors should look on this as no more than a stay of execution though; with the amount of money involved, it would be optimistic to expect that the Chancellor will just leave pension tax relief untouched for the rest of this parliament."

Shadow chancellor John McDonnell accused Mr Osborne of "yet again ducking a big decision and putting the interests of his party ahead of those of our country".

He said: "The Government looks almost at times like it is in stasis because of splits in the Tory party and this sort of dithering only further highlights how the Tories are holding us back.

"The big test for this Budget is whether it can start to lay the secure foundations for the economy of the future. This decision suggests George Osborne is only interested in securing the future leadership of his party."

Lib Dem Treasury spokeswoman Baroness Kramer said: "Reports that George Osborne has dropped his dangerous pensions Isa programme are welcome, but if he decides to do nothing it will mean that lower income savers will continue to get a bad deal.

"If the Chancellor was the great reformer he claims to be, he would be looking to implement a new flat rate relief scheme at 33% to encourage lower income savers and restore fairness to the system.

"Since losing Liberal Democrat influence in the Treasury, George Osborne's political judgement has been poor. First he bungled tax credits, now he is botching true reform of our pension system."

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