Pension Isa wins out – media reports

George OsborneThe Chancellor is set to opt for a pension Isa structure, taking billions of pounds of tax relief off higher rate taxpayers, according to media reports.

The Telegraph has reported that Chancellor George Osborne’s plans for a pensions Isa ‘will be unveiled in his Budget.

The proposal sees the Chancellor clash with pensions minister Ros Altmann who has warned that a pension Isa system would undermine pension saving.

The pension Isa would see contributions paid out of taxed earnings, but growing tax-free within the pension wrapper, and not subject to income tax when withdrawn.

The unconfirmed Telegraph report, which leads the front page of the newspaper, says that the incentive of tax relief would be replaced with a 20 per cent matched contribution. The Treasury declined to describe the Telegraph story as inaccurate but said no decision has yet been taken, even though the Budget is less than two weeks away.

Hargreaves Lansdown says while the offer of a 20 per cent top up, with tax free withdrawals may superficially attractive, any change to pension taxation would have to involve cuts to the tax relief available. Hargreaves estimates the annual allowance would be cut down to around £10,000. 

The Financial Times meanwhile has reported that the Treasury is still considering two proposals – pension Isa and a flat-rate relief of between 25 and 35 per cent. Earlier this week the FT reported that the Prime Minister had told the Chancellor to ‘play it safe’ with regard to the pension incentives consultation.

A HM Treasury spokesperson says: “The government launched a wide-ranging consultation into pensions tax relief last summer. We have not decided on whether or how to reform the system and are considering all options, including retaining the current system. This consultation is now closed and we will respond at the Budget.”

Hargreaves Lansdown head of pensions policy Tom McPhail says: “For a higher earner, it would mean exchanging 40 per cent relief on £40,000 for 20 per cent relief on £10,000; a loss of £14,000, in exchange for a paper promise from a politician which would depend on a future government for its honouring.”