Budget 2016: George Osborne might have u-turned on the pensions Isa but we shouldn't celebrate stability yet

Steven Cameron
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Chancellor George Osborne may have pulled the plug on changes to pension tax relief in next week’s Budget, but we're not out of the woods yet - and can’t rule out him having other ‘detailed technical’ changes up his sleeve for next Wednesday.

While arguably simpler for brand new savers, the pensions Isa idea was problematic. It would have required all existing pensions to be frozen with a new arrangement put in place for future contributions, adding significant complexity for every existing pension saver, and not at all helpful as the government continues to roll out its flagship automatic enrolment initiative.

It would also have made it very difficult for individuals to consolidate older and future pensions.

A move to a single rate of relief for all of 33 per cent would have improved incentives for basic and non-taxpayers to save into private pensions, especially at a time when increases to state pension age makes personal pension provision even more important.

However, there was also a clear downside for higher rate taxpayers and the likely need to treat employer contributions, on behalf of higher rate payers, as a benefit in kind. Setting the single rate at 33 per cent, would have limited the downsides and ensured pensions were still tax efficient, even for those who’d have been higher rate taxpayers in retirement.

However, it was rumoured that the government favoured a flat rate of 25 per cent, which would have not offered the same protection for higher rate taxpayers.

The Treasury’s original consultation never discounted retaining the current system, but equally, with deficit pressures, it was widely accepted that ‘no change’ was not an option. So what does this mean for next week’s Budget?

We may see adjustments within the existing framework such as further reductions in how much can be paid into pensions or even restrictions on new entitlements to tax free cash going forward. It may be that increasing the threshold for higher rate tax payers could effectively reduce the government’s pension tax relief burden.

There is still a lot of speculation, so we shouldn’t be celebrating stability just yet.

And the Treasury comment than ‘now’ is not the right time for radical change, does beg the question of how soon after the EU referendum might the right time arrive.

A commitment to no further changes within this government’s term would be very welcome, but this may not be the last Budget where we’ve been holding our breath in anticipation of major changes to pensions tax relief.

Ultimately, it seems that broader political considerations are what tipped the scales for this year’s Budget.

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