Time to end pension tax relief - Director of Finance Online

George Osborne should curtail pension tax reliefs, despite the superannuation industry getting its retaliation in first. Any tax increase will cause squeals, but of all the chancellor?s options, taxing pensions is easiest and could even win votes.

The pension contribution-relief rules have meant that for each ?100 put into their funds ? corporate or private ? basic rate income-tax payers receive ?125 of investments. However, 40 per cent taxpayers have their payments enhanced by two-thirds and top-rate payers see their contributions? doubled.

Now that ?fairness? seems to be a measure of the fiscal system, it?s not hard to see how differential reliefs fail the test.

It is in the chancellor?s interest for people to pay into pensions. It makes them less of a burden on the state in old age and having a nest egg makes people feel wealthy, and more likely to consume, even if the pension pot doesn?t ultimately buy much income.

But the question for Osborne is whether workers would put less into their pensions if their tax relief was curbed. And the suspicion is that they would contribute anyway. The elasticity is almost certainly tight. People invest in pensions to look after their own future. If the contributions don?t go so far, they might well put in even more each year to achieve their objective.

And if some high-earners decide that relief at only the basic income-tax rate does not offset the loss of flexibility from locking savings into a pension plan, they will still probably save in an alternative vehicle.
So of all the options Osborne has for balancing his books, pensions look like a win-win ? less cost to the exchequer but a population that still aims for financial independence.

He could limit the amount that can be saved, but that has already come down from ?255,000 to ?50,000 for the 2011/12 tax year and going lower would hit middle-earners desperate to top up their paltry pots. He could tax the 25 per cent of pots that people can take as lump-sums when they retire ? but the public would notice and resent that, potentially losing the government parties votes.

So tempering relief looks the easy option. Limiting 50 per cent taxpayers to 40 per cent relief would be a start, but why stop there? Putting a limit of 30 per cent on all higher-rate taxpayers is simply a messy compromise. Reducing everyone to the same 20 per cent basic-income tax?rate for relief would save the Treasury a meaningful sum and show that we are all in it together.

The mass of basic-rate payers would not gain, but they might take sadistic satisfaction from the better-paid being worse off. And that can mean votes.

Not all Osborne?s decisions will be this easy and with such guaranteed success. And in the unlikely event that people do stop saving and spend the cash they would have put into pensions, that will save the Treasury even more money and it would be just the sort of? healthy stimulus to consumption that the chancellor would like but cannot otherwise afford.

Source: http://dofonline.co.uk/blogs/the-edge/budget-speech/time-to-end-pension-tax-relief-3454654645/

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