Osborne Urged to Revamp U.K. Pension-Tax Relief in March Budget

  • Ending relief on employer contributions could save $11 Billion
  • Chancellor should scrap 25% tax-free lump sum at age 55

U.K. Chancellor of the Exchequer George Osborne should scrap some pension giveaways in next month’s Budget to bring clarity to Britons saving for retirement and raise money to meet his deficit-reduction goals, the Centre for Policy Studies said.

In a report published on Thursday, the London-based research group singled out ending a tax relief on employer contributions to pension plans as the most cost-efficient move, saving the Treasury an estimated 8 billion pounds ($11.4 billion) a year.

Another measure suggested, introducing a flat rate of income-tax relief, probably wouldn’t generate similar savings. Any flat rate set above 20 percent would need to be accompanied by restrictions to the 40,000-pound annual limit on pension contributions eligible for tax relief, according to the report.

“When it comes to pensions’ tax relief, now is the time to act decisively,” wrote Michael Johnson, a research fellow at the CPS. “If the chancellor is to reform the manner in which he incentivises saving, he should focus on simplification, while also securing a substantial saving to the exchequer to help address the deficit."

Treasury Consultation

The government carried out a consultation on pension-tax relief last year. One proposal, first mooted last year by former Liberal Democrat pensions minister Steve Webb, would see a single rate of tax relief of 33 percent. Currently, people get relief according to their marginal rate of income tax, meaning those paying 40 percent or the top 45 percent rate get more money back than people who pay the basic 20 percent. Osborne announces his Budget on March 16.

Johnson said that decisive reform was preferable to repeated changes in the pension-contribution allowance, and that once those are implemented, reforms to retirement savings should be left alone to avoid uncertainty. The report also considered possible measures such as ending the 25 percent lump sum retirees can withdraw tax-free, and replacing all income tax and payroll relief with a 50 pence incentive for each pound saved after tax.

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