Leaning towards a Pisa?

Pensions tax relief is in the spotlight again as a new Green Paper looks at the whole area of incentivising savers to prepare for retirement.

It’s only a few months since the so-called ‘pensions revolution’ came fully into play, with a major liberalisation of the pensions regime and rules.

Yet the Chancellor George Osborne published a new Green Paper at the same time as the latest summer budget, entitled “Strengthening the Incentive to Save: a consultation on pensions tax relief”.

Whilst this consultation document does say that the right answer might be to leave things alone, in his Budget speech, the Chancellor touched upon the idea of a gradual move to a new system. This could mean that those with pensions already would be unaffected, but the tax treatment on new pensions would be more like an Isa – i.e. you contribute out of your post-tax income, but any returns would be tax-free. Some have already dubbed this a “Pensions Isa” or “Pisa”.

For such a scheme to work there would need to be some sort of carrot to encourage people to take one out. The Chancellor hinted in his speech that this could be in the form of a Government “top-up” into the fund. However, the cynics are already suggesting that the public will find it hard to buy into the promise of tax free income 25-30 years into the future, when you look at the volume of changes to the pensions system that have occurred over the last 25 years.

Others believe that the real reason for the Green Paper was to look at ways to unlock the untaxed wealth in the pension funds of those who have been saving for decades. By doing so, the Chancellor could bring forward billions of pounds of tax revenue. With a National Debt in excess of £1.5 trillion, you can see why this would be worth exploring.

In response to this Green Paper, Liberal Democrat Steven Webb, the ex-pensions minister, would like the consultation to look much more widely than simply applying an Isa-style tax treatment to pensions. He believes there is a strong case for keeping tax relief but making it much simpler and fairer. His proposal is a flat rate of tax relief for all – perhaps 33% - whilst he would like to see the abolition of the complex Lifetime Allowance and a simplification of the Annual Allowance.

Whatever materialises, it is clear that it will have some impact on your retirement planning.

For more information, or for help with you retirement planning, contact Kellands.

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