Steve Webb, the ex-Liberal Democrat MP, who held the Ministerial role in the Coalition Government until last May, is set to attack the widely tipped policy move by the Chancellor in a speech later today.
Mr Webb, now Royal London’s director of policy, will compare the ‘Pensions ISA’ proposal to former Chancellor Gordon Brown’s notorious tax raid on occupational pension schemes.
His speech said: “Replacing tax relief with a Pensions ISA could be George Osborne’s ‘Gordon Brown’ moment. The former Chancellor probably thought that raising billions of pounds from pensions through abolishing dividend tax credits was a complex change which few would understand but which would quietly raise billions from pension savers.
“But the legacy of that damaging change is still being felt today, and the former Chancellor’s name is forever associated with that measure.
“There is a real danger that with the ‘Pensions ISA’ history could repeat itself.
“Abolishing tax relief on pension contributions would certainly raise large sums for the Chancellor, even if some of the proceeds were given back as a government top-up into pension pots.
“But the damage done to pension saving would be incalculable, as pensions are once again seen as a convenient pot for cash-strapped Chancellors. Just at the point that millions more people are starting to save through automatic enrolment, upheaval in the tax treatment of pensions is the last thing we need.”
George Osborne opened up the possibility of such changes in the summer Budget. A green paper was launched after to give “careful consideration” to this idea. The Government has recently said that it will not be commenting officially until the March Budget when it will report findings from this review.
Mr Osborne told Parliament last summer: “While we’ve taken important steps with our new single tier pension and generous new ISA, I am open to further radical change. Pensions could be taxed like ISAs.
“You pay in from taxed income – and its tax free when you take it out. And in-between it receives a top-up from the government."
The Green Paper “asks questions, invites views, and takes care not to pre-judge the answer”, he said.
Among the pitfalls of Pensions ISAs, are the following points, Mr Webb will tell delegates:
- The need for pension schemes and providers to run parallel pension accounts for each individual for decades to come, one with tax already taken out and one yet to be taxed
- The risk that if pensions in payment are tax free, the ‘Lamborghini risk’ will be exacerbated; at present, withdrawals from pensions are taxed, which acts as a brake on withdrawals; if they were tax free there would be much less incentive to spread withdrawals over a number of years
- Taxing pensions up-front effectively brings forward tax revenues from future generations; yet it is future generations who will face the biggest bills for pensions, health care and social care - they need as broad a tax base as possible.
- Confidence in pension saving among employees and employers would be further damaged. If the Government contribution to pensions was simply a top-up to taxed contributions this would simply be another element of the system which Chancellors could tinker with from year to year, creating yet more uncertainty.