Tuesday, July 16

George Osborne abandons middle-class pensions raid after backlash



George Osborne has abandoned plans for a tax raid on the pensions of millions of middle-class workers in his forthcoming Budget amid concerns that it will “damage saving”.

The Chancellor had been considering plans to abolish higher rate tax relief in a move which Tory MPs had warned cause a “riot” within the Conservative party and damage his leadership ambitions. However he has now dropped the plans from his Budget entirely amid concerns that global economic uncertainty means it is “not the right time” for radical reforms.

Other changes, such as a cut in the amount people can put in their pension pots before being hit with penal rate rates of tax, have not been formally ruled out but are understood to be unlikely. The proposals to overhaul pensions had led to a series of rows within the Government and had threatened to further divide the party, which is already deeply split over Europe.

An ally of Mr Osborne said: “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.

“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.” The Chancellor has spent months considering a major shake-up of the pension system, which costs the Government £50billion a year.

The extra money could have allowed Mr Osborne to reduce the higher rate of income tax and clear the deficit. Mr Osborne had been considering two controversial options for reforming pensions tax relief.

Under the first the higher rate of tax relief on pensions would have been scrapped and replaced with a new “flat rate” of as little as 25 per cent. Whitehall insiders revealed earlier this week that he had rejected the options amid concerns it was “politically toxic”.

He was instead considering plans to scrap pensions relief entirely and enable people to withdraw money from their retirement pots without paying any tax.

However Baroness Altmann, the pensions minister, raised concerns about the plans and said that they could encourage people to withdraw savings and spend them instead of keeping them for later in life.

An analysis conducted for The Daily Telegraph showed that higher rate taxpayers would lose up to 15 per cent of their retirement income. Steve Webb, the former Liberal Democrat pensions minister, warned that the plans – described as a pensions Isa – could drag more than 500,000 people into the higher rate of income tax overnight.

While Mr Osborne has formally ruled out cutting tax relief, he could still cut the lifetime allowance on retirement savings further. The allowance, the amount people can put into their pension pots before being subject to penal rates of tax, is already being cut from £1.25million to £1million.