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Pensions: George Osborne to drop tax relief plans Pensions: George Osborne drops plans to cut tax relief
(about 1 hour later)
Chancellor George Osborne is to drop plans to change the system of tax relief on pensions. Chancellor George Osborne has dropped plans to remove or change the system of tax relief on pensions.
An Isa-style scheme would have ended tax relief on contributions, but made pension pot withdrawals tax free. An Isa-style scheme would have ended tax relief on contributions for those in work, worth an estimated £21bn, but made pension pot withdrawals tax free.
Mr Osborne was due to unveil the plans in the Budget on 16 March, but was warned it could cause a run on savings. An alternative option was to set a flat rate of tax relief, which may have been unpopular with higher earners.
The proposal, which would have made savings from the government's £21bn tax relief bill, had been opposed by pensions minister Baroness Altmann. A Treasury source said it was "not the right time" to make changes to pension tax relief.
Conservative MPs had also become concerned about the impact of the changes on higher earners. Mr Osborne had been expected to unveil changes in the Budget on 16 March, but was warned that introducing Isa-style arrangements for pensions could prompt a mass withdrawal of funds.
A Treasury source said now was not the time to make changes to pension tax relief. Pensions minister Baroness Altmann made clear her opposition earlier this week, saying that making pension withdrawals tax free would create new risks.
BBC political correspondent Eleanor Garnier says the decision is a recognition of how fragile the EU referendum campaign is - avoiding the changes removes the risk of upsetting voters ahead of the vote in June. "The freedom and choice reforms have put us in a place where's people's pensions can work well for them," she told the Financial Times.
The chancellor had been considering two options - the other being a flat rate of tax relief for everyone saving for a pension. Those who pay higher rates of tax currently get bigger breaks. "However, tax is a natural brake on them spending their pension fund too soon... We may decide that the current system is best."
Conservative MPs had also become concerned about the impact on their constituents of any move to flat rate relief, which would have reduced breaks for higher rate taxpayers.
Economic uncertainty
BBC political correspondent Eleanor Garnier says Mr Osborne's decision is also a recognition of how fragile the EU referendum campaign is - abandoning the planned changes removes the risk of upsetting voters ahead of the vote in June.
An ally of the chancellor told the Times: "George has always been clear he wouldn't do anything to damage saving.An ally of the chancellor told the Times: "George has always been clear he wouldn't do anything to damage saving.
"He's listened to what people have said and concluded that now isn't the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head."He's listened to what people have said and concluded that now isn't the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head.
"It is also clear that employers wouldn't welcome a wholesale change in the way they administer schemes. So he is not going to tear up the system of pension tax relief. There won't be any changes to tax relief at all in the budget.""It is also clear that employers wouldn't welcome a wholesale change in the way they administer schemes. So he is not going to tear up the system of pension tax relief. There won't be any changes to tax relief at all in the budget."
Industry opposition
Baroness Altmann made clear she was opposed to the idea, and there was the threat of resistance from Tory MPs worried about the effects on their constituents, potentially costing higher-rate taxpayers thousands of pounds from their retirement income.
The pensions minister said: "The freedom and choice reforms have put us in a place where people's pensions can work well for them.
"However, tax is a natural brake on them spending their pension fund too soon."
How pension tax relief worksHow pension tax relief works
Pension tax relief is given on contributions at the rate of income tax - 20%, 40% or 45%.Pension tax relief is given on contributions at the rate of income tax - 20%, 40% or 45%.
Someone at the 20% rate contributing £10,000 gross to their pension would have to pay £8,000 net, at 40% it would be £6,000, and £5,500 for those at 45%. So it favours the better off.Someone at the 20% rate contributing £10,000 gross to their pension would have to pay £8,000 net, at 40% it would be £6,000, and £5,500 for those at 45%. So it favours the better off.
Pension savers currently pay no tax on money they put in but pay tax on the cash they take out above their personal allowance.Pension savers currently pay no tax on money they put in but pay tax on the cash they take out above their personal allowance.
The amount anyone can save into a pension and get tax relief is capped at £40,000 annually and £1.25m in their lifetime.The amount anyone can save into a pension and get tax relief is capped at £40,000 annually and £1.25m in their lifetime.
The proposal had been opposed by the pensions industry. The prospect of radical pensions reform had also been opposed by the pensions industry.
Yvonne Braun, of the Association of British Insurers, said the scheme would have hit current savers and could have created a "fiscal time bomb" for future generations.Yvonne Braun, of the Association of British Insurers, said the scheme would have hit current savers and could have created a "fiscal time bomb" for future generations.
She said: "Many savers would be worse off and it would also damage the economy more widely because of its impact on saving and investment."She said: "Many savers would be worse off and it would also damage the economy more widely because of its impact on saving and investment."
Changes to the pensions system in recent years have included automatic enrolment into workplace pensions in 2012 and people aged 55 and over being allowed to take their retirement pots how they want rather than being required to buy an annuity retirement income introduced in 2015. Changes to the pensions system in recent years have included automatic enrolment into workplace pensions in 2012, and people aged 55 and over being allowed to take their retirement pots how they want rather than being required to buy an annuity retirement income - introduced in 2015.