George Osborne will abolish pension perk in tax bombshell, claims former minister

Steve Webb, who worked with Chancellor on pension strategy, says Treasury is plotting reforms hitting hundreds of thousands



George Osborne is planning to abolish the tax-free lump sum on retirement incomes in a bid to raise £4 billion in lost revenue, according to a former pensions minister.

Steve Webb, who worked with the Chancellor on pension strategy in the coalition government, says the Treasury is plotting a "tax bombshell" that will hit hundreds of thousands of people.

Mr Webb says the current perk allowing people to access 25 per cent of their pension pots tax-free in a single lump sum when they reach 55 is "heading for extinction" in the budget next month.

Osborne would like to scrap all tax relief on pension contributions and replace it with an Isa-style system, the former minister wrote in The Sunday Times.

In recent months, speculation about pension reforms has focused on proposals to equalise the rates of pension tax relief so that all taxpayers receive the same benefits. This would hit higher-rate taxpayers.

But Webb, who now works for the pensions firm Royal London, said contacts with Treasury officials had convinced him that Osborne would like to take the more radical course.

Webb says: "I do not believe that the flatrate was ever the Treasury's first preference."

The Isa approach would mean "an extra tax bombshell" that "seems to have gone almost completely unnoticed", Webb writes, because it would scrap the tax-free lump sum.

"Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free — a hugely tax-advantaged way of saving," he writes. "In effect, a quarter of the money in your pension never gets taxed at all under the current rules.

"But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes in to a pensions Isa has already been taxed, there is no equivalent of the tax-free lump sum.

"Given that the tax-free lump sum costs the chancellor around £4bn per year in lost revenue, it is easy to see why he might like to get rid of it. It is remarkable to think that one of the most popular and best understood parts of the tax system — the tax-free lump sum — could be on the brink of extinction without anyone noticing."

I've already had mine.

I'm alright Jack; ring the bell, I'm on the bus.

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.

"Damage saving"? Damage Tory votes more like!

It's been put on the back burner for now. When the time is right, it'll rear it's head again.