Pensions tax relief climb-down a ‘missed opportunity’


10 Mar, 2016

Pensions tax relief climb-down a ‘missed opportunity’

George Osborne’s choice to withdraw from making drastic reforms to pensions tax relief was a “missed opportunity” to enhance the retirement fund of the ordinary British worker by over 14%, according to a study by the Resolution Foundation, thinktank.

The chancellor’s associates made a surprising announcement last week, less than a fortnight before the budget, that Mr Osborne had scrapped ideas for a shakeup of tax relief on pensions contributions which would have seen all workers paying a flat rate.

Currently, pensions contributions are made from salaries before tax. This means that high income employees are benefitting more from the system, because they receive tax relief at 40%, compared to the 20% for lower earners.

The Resolution Foundation’s study shows that by changing to a 30% flat rate instead could have enhanced the retirement funds of the average earner by £11,200, or 13%, while a full-time employee on the national living wage would have been 14% better off, or £3,200.

Research also discovered that the current system, which amounts to £35bn a year, is “highly regressive”, with the top 1% of taxpayers receiving 13% of all pensions tax relief – the same as the entire bottom half of taxpayers.

The Chancellor abandoned the plan after facing pressure from backbenchers who were worried about the impact on higher earners and the dangers of disruption in the pensions industry. According to the thinktank’s calculations, a higher earner on a salary of £60,000, could have missed out on up to £22,000 of their pension pot if the reforms had gone ahead.

Tim Farron, Lib Dem leader, said: “For all his talk of being a great reformer, George Osborne only ever wanted to change our pensions system if he could use it to claw back money into the Treasury. When he realised he could only benefit the Treasury by raiding the pensions of higher earners he simply gave up. He never had any interest in making our pensions system fairer for ordinary people”.

Next Wednesday the chancellor will deliver his budget, in the conditions of a weakening economic outlook. Mr Osborne has already indicated that he may declare fresh spending cuts to meet his objective of achieving a surplus on the public finances by 2020.

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