Minister warns Osborne on tax relief

George Osborne

A decision is due, possibly in the Budget this month, on the shape of pensions tax relief. Opponents fear reform proposals would do deep and lasting damage to retirement saving, reports The Times.

Baroness Altmann, a former consumer campaigner, has come out against an idea which would take pension income out of the tax net. “The freedom and choice reforms have put us in a place where people’s pensions can work well for them,” she told the Financial Times. “However, tax [applied to pension income under the current system] is a natural brake on them spending their pension fund too soon.”

The chancellor is thought to favour a “pension Isa”, which would end upfront tax relief on pension contributions and instead allow savers to draw their income tax-free in retirement.

The pension Isa was the most radical of all the options for reform on the table since the government began reviewing pensions tax relief last year.

It is understood that two scenarios for reform have been sent to the Office of Budget Responsibility to be costed; the pension Isa and flat-rate relief of between 25 and 35 per cent. Under the current system, individuals can receive relief on pension contributions at the same rate they pay tax, whether 45, 40 or 20 per cent.

Another proposal, to offer a single rate of tax relief for all pension savers — expected to be less attractive to higher earners — was also on the table.