5th February 2016
Former pensions minister Steve Webb will today warn that replacing pensions with a pension ISA could be the chancellor’s ‘Gordon Brown moment’.
Referencing former chancellor Brown’s notorious tax raid on occupational pensions schemes, Webb said currency chancellor George Osborne was making a mistake if he decides to go ahead with the pension ISA.
‘Replacing tax relief with a pensions ISA could be George Osborne’s ‘Gordon Brown’ moment,’ said Webb.
‘The former chancellor probably thought that raising billions of pounds from pension through abolishing dividend tax credits was a complex change which few would understand but which would quietly raise billions form pensions savers. But the legacy of that damaging change I still being felt today, and the former chancellor’s name is forever associated with that measure.’
Osborne is currently consulting on the pension tax relief system, which provides tax relief based on your highest rate of income tax. The system is broadly seen as unfair as higher earners receive 75% of the relief.
The options Osborne is consulting on is are cutting higher rate tax relief, possibly to a flat rate for everyone; doing nothing at all; or scrapping pensions in favour of a pension ISA.
Webb warned: ‘There is a real danger that with the pension ISA history could repeat itself,’ he said. ‘Abolishing tax relief on pension contributions would certainly raise large sums for the chancellor, even if some of the proceeds were given back as the government top-up into pension pots.
‘But the damage done to pension savings would be incalculable, as pensions are once again seen as a convenient pot for cash-strapped chancellors.’
There were other more logistical problems with introducing a cash ISA including requiring pension schemes to run parallel pensions accounts for each individual for decades to come. There was also a worry that a tax-free pension income would exacerbate the number of people who strip their pension of cash.
And also that ‘taxing pensions upfront effectively brings forward tax revenues from future generations yet it is future generations who wil face the biggest bills for pensions, healthcare and social care, they need as broad a tax base as possible’.
He said the introduction of a pension ISA would also undermine auto-enrolment.
‘Just at the point that millions more people are starting to save through automatic enrolment, upheaval in the tax treatment of pensions is still the last thing we need.’