DIY Investorby Andy Davis / February 18, 2016 / Leave a comment
Published in March 2016 issue of Prospect Magazine
The Chancellor has a record of springing pension surprises in the Budget, but just suppose for a moment that the reports are true and that George Osborne plans to abolish the top rates of tax relief on pension contributions and move to a flat rate for everyone somewhere between 25 per cent and 33 per cent. That would divert public spending from the highest earners, who now receive tax relief at 40 or 45 per cent, while increasing support for the lower paid, who face the biggest risk of poverty in old age.
This would be welcome. For a start, it would show enlightened self-interest by the government (on behalf of future taxpayers) if the less well-off end up more able to support themselves in later life. Second, together with mandatory employer contributions to the new workplace pensions, it will give an extra leg-up to people saving into them.
But there’s an important point that some might miss. By changing the state’s contribution so that it is no longer pegged to income tax rates, the Chancellor would be turning a tax relief into a subsidy. This would immediately benefit those on lower incomes (and our children, who have no earnings but do have self-invested personal pensions that qualify for tax relief). But as a subsidy not pegged to tax rates, it is open to change on the whim of future chancellors—hardly a recipe for the end of tinkering with pension rules.