22 Feb, 2016
Steve Webb claims Osbourne to abolish pension perk
According to Steve Webb, former pension’s minister, Chancellor, George Osborne, is scheduling reforms to put an end to the tax-free lump sum on pension funds in a bid to raise £4 billion in lost revenue.
Steve Webb said, "I do not believe that the flatrate was ever the Treasury's first preference".
Webb, who previously worked with the treasury on pension policies in the coalition government, announced that the Chancellor is planning a "tax bombshell" that will affect hundreds of thousands of retirees.
Currently, the pension perk allows people over the age of 55 to access 25% of their retirement income in a single, tax-free lump sum. According to Webb, the budget next month will see this pension benefit "heading for extinction".
The former minister wrote in The Sunday Times that Osborne wishes to abolish all tax reprieve on pension incomes and change it to an Isa-style system.
Recently, rumours surrounding pension reforms have concentrated predominantly on suggestions to balance the rates of pension tax relief so that all taxpayers benefit from the same perks. However, this would hit taxpayers paying higher rates.
Webb, now employed at pensions giant, Royal London, said associates with Treasury professionals had caused him to believe that Osborne intends to take the more drastic approach.
Webbs add that the Isa route would result in "an extra tax bombshell" which "seems to have gone almost completely unnoticed", due to scrapping the tax-free lump sum.
He writes, "Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free — a hugely tax-advantaged way of saving. In effect, a quarter of the money in your pension never gets taxed at all under the current rules”.
He added, "But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes in to a pensions Isa has already been taxed, there is no equivalent of the tax-free lump sum”.
"Given that the tax-free lump sum costs the chancellor around £4bn per year in lost revenue, it is easy to see why he might like to get rid of it. It is remarkable to think that one of the most popular and best understood parts of the tax system — the tax-free lump sum — could be on the brink of extinction without anyone noticing".
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