Former pensions minister Steve Webb warns chancellor George Osborne: Don't become the ghost of Gordon Brown

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Webb says Osborne must not repeat the mistakes of his Labour predecessor Gordon Brown (Source: Getty)

Former pensions minister Steve Webb will today urge chancellor George Osborne to abandon proposals for a controversial change to the pensions system.

Webb, who was pensions minister in the coalition and is now director of policy at Royal London, will warn Osborne not to repeat the mistakes of his Labour predecessor Gordon Brown by fiddling with the system and replacing pensions tax relief with a so-called pensions ISA.

“There is a real danger that with the pensions ISA, history could repeat itself,” Webb will say in a major speech to pension experts.

“The damage done to pension saving would be incalculable, as pensions are once again seen as a convenient pot for cash-strapped chancellors.”

A pensions ISA, which was first floated in a government Green Paper last year, would see retirement savings change to a system where tax is charged on contributions but not withdrawals, which is the opposite of the current system.

When he was in Number 11, Brown abolished dividend tax credits, effectively raiding billions of pounds from pension savers to boost the Treasury’s coffers.

“The legacy of that damaging change is still being felt today, and the former chancellor’s name is forever associated with that measure,” Webb will say.

Read more: Insurance group slams pensions ISA

Steven Cameron, regulatory strategy director at Aegon, said: “Gordon Brown’s raid discouraged employers.

“The pension ISA would be different. I think it would disillusion consumers and discourage them from saving.”

Osborne said last October that he would “respond fully” to the Green Paper at next month’s Budget. Industry experts told City A.M., however, that they expect the chancellor will introduce a new flat rate of pensions tax relief instead of the pensions ISA.

With the flat rate, basic rate taxpayers would receive more tax relief than they currently do, while higher rate taxpayers would see their tax relief slashed.

Tom McPhail, head of retirement policy for Hargreaves Lansdown, told City A.M. the current system is “inefficient and complicated and heavily weighted towards higher earners and therefore socially not particularly attractive”.

Carolyn Saunders, national head of pensions at Pinsent Masons, agreed, but added: “While [the flat rate] would be great for those who are on basic rate tax, it does disincentivise those at the other end of the scale.”

Conservative MP Mark Garnier, meanwhile, was less convinced, and said: “People who pay a higher rate of tax make a bigger contribution to society anyway. Penalising people because they pay a higher rate of tax seems unfair.”

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