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The pensions tax relief system has clearly become a jumbled mess and is overdue a shake-up. Despite what George Osborne did and what the current Chancellor has threatened to do, the Treasury may still want to raise more money by cutting pension tax relief further. The loss of higher rate relief has been mooted at various times in the past. The most recent variation being an introduction of a single rate of relief to encourage saving among basic rate taxpayers, but at the expense of higher rate payers. While socially redistributive, it will be the Treasury, not savers, that benefits most.
A more radical variation is switching to an ISA-style tax relief system where money is taxed before it goes in rather than later when it comes out. This would give the Treasury much improved short term tax receipts, albeit at the expense of not collecting as much tax further down the line. However, as we saw with pension flexibilities, short term tax takes are very attractive to the Treasury, with the reduction in future tax yield being put in the “somebody else’s problem” box.
The 25% tax-free cash lump sum at retirement is another attractive target for the Chancellor. Although removal would be too extreme, there’s plenty of scope for limitation. At the same time, the Chancellor may decide to add a sweetener to make it all seem not so bad. While he previously announced plans to reduce the Money Purchase Annual Allowance (MPAA) to £4,000 from its current £10,000, he might decide to ‘generously’ only reduce it to £5,000, putting it in line with the new Lifetime ISA for a basic rate tax payer.
Public reaction to any further tinkering with the present system will most likely be to view pensions as even more complex, so making it less attractive when compared to buying property or investing in an ISA. If the Government truly wants to encourage people to save for retirement, it should try to make it more attractive and stop its relentless negative tinkering.