Rumours circulate that Chancellor George Osborne had quadrupled stealth taxes on pension pots as soon as he became Chancellor.
Now, millions of savers face a pensions raid as Osborne might raid pensions in upcoming announcement next month. With over £70 million annual pensions paid by UK employees, analysts have compared the figures pre and post-Osborne tenures. They warn that the Budget may also indicate more cutbacks, mostly affecting the middle class.
According to Hargreaves-Lansdown Retirement Policy Chief Tony McPhail :
“In the past couple of years there has been a progressive encroachment on the middle classes.
“It’s not just top earners and the super wealthy seeing tax-exempt allowance cut. The Government hasn’t got anywhere to go now but the middle earners.”
Pensions spending had steadily increased because of a growing and ageing population. The government planned to lower the lifetime tax-free allowance. By lowering this amount, many savers may face up to 55 per cent in tax charges once they cross over the imposed limit.
Osborne had made tree cuts to the lifetime tax-free allowance in the last five years. From £1.8 million, the Chancellor cut it down to £1.5 million and recently to £1.25 million. Analysts expect Osborne to lower it down to £1 million in April.
According to Chancellor George Osborne’s former adviser Steve Webb, the £4 billion the Chancellor might take from the pensions is highly likely. Those with tax-free lump sums will need to pay up without even knowing.
He estimates that thousands of people will suffer from Osborne’s actions. Webb also said Osborne is leading towards removing all tax relief on pensions. This may force high-rate taxpayers to shift to Isas and snub the pensions system.
“Under the current system you can get tax relief on your pensions contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax free – a hugely tax-advantaged way of saving,” wrote Webb in the Sunday Times (paywall). “But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes into a pensions Isa has already been taxed, there is no equivalent of a tax-free lump sum.
“Given that the tax-free lump sum costs the chancellor around £4bn 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.”
With the coming of a possible flat-rate pension tax rate, many employees might see their pension pots dwindled. However, those who lost track of their previous pensions a few years back could see their pension pots decreased in value.
Aegeon Regulatory Strategy Director Steven Cameron said:
“If pensions aren’t brought together, it’s hard to keep track of multiple management fees from the different pension providers, some of which will be less competitive.
“Charges eat into the value of retirement funds, and consolidating can often mean a better overall deal.”
About 92 per cent of the UK’s population are off their retirement targets. Some have lost track of their previous investments. Majority do not mind the growth of their pension funds at all.
“The benefits in consolidating multiple defined contribution pension pots is more important than ever before,” said Cameron.
“Consolidation immediately makes engagement more efficient. When pots are spread widely it’s much harder to engage and at worst, you could lose track of an older pension entirely.”
The Government has put plans to automatically consolidate small pots on hold until at least 2018.
Cameron added: “It’s not at all clear if the Government will return to its plans to automatically consolidate small pension pots when people move jobs.”
“Our new guidance service Aegon Assist can point out the key issues customers should be thinking about regarding the consolidation of their pension pots and they may then seek advice.”
The Institute of Economic Affairs said plans for the flat-rate of pension tax is “misguided” and only “arbitrary”.
The flat-rate, supported by a great number of pension providers, said it was an attack on pension pots, especially for those with bigger pots. The IEA said the flat-rate pension rates would be difficult to implement.
It said it was only an “arbitrary subsidy” to savings.
“Overhauling the whole tax relief system in the way proposed would be devoid of any economic rationale. It would move our system from one of genuine tax relief, and replace it with a system of arbitrary subsidy.
“After all, the proposed rate of “relief” between 20% and 33% is not a tax rate paid by any UK taxpayers at present.”
The flat-rate of contributions Chancellor George Osborne had proposed will land between 25 to 33 per cent.
The IEA added that the pension contributions of today receive tax relief depending on the marginal rate of income tax a citizen has is still the better options as higher earners still paid higher tax. The implementation of a flat-rate tax rate will, ironically, create a more complex system.
“[Flat-rate] implementation would be incredibly complex in practice.
“It would necessitate hundreds more pages in the tax code to counteract potential loophole exploitation and to correct for the incentives the new regime creates.”
Paisley and Renfrewshire South MP Mhairi Black said that women born in the 1950s will suffer the worst due to the pensions age’s rapid increase to equalise with that of men. By 2020, the Conservative government’s plan may accelerate the speed of the pension age from 65 to 66, close to that of men’s.
“It would seem that this is not the first time that the government have misled people, or certainly gotten their facts wrong,” the SNP MP said, before launching into her speech.
“The Pensions Minister [Baroness Altmann] gave inaccurate information to the Work and Pensions Committee when she said that WASPI [Women Against State Pension Inequality] was calling for the Government to undo the Pensions Act 1995—in other words, to reduce the pension age for women back to 60.
“That is strange, given that she was so involved with WASPI before being employed by the Government,” Black said, before claiming she had heard the same three responses to her arguments from MP’s.
“I have been met with the same three rebuttals over and over—we heard some of them in the previous speech—given by the Government to justify doing absolutely nothing.
“That brings me on neatly to the second reason why the government think that nothing should be done: the principle of equality. We hear time and again that this is about equality, which is why we cannot repeal the 1995 Act and why the women affected should just put up with it.”