Osborne's ISA-Style Tax On Pension Contributions Is An Economic Threat
The chief executive of Britain’s largest mutual life and retirement group has attacked UK chancellor George Osborne’s proposal to overhaul how pension contributions are taxed.
Phil Loney, chief executive of Royal London, said Mr Osborne’s suggestion of taxing retirement savings in a similar way to Individual Savings Accounts could jeopardise the entire UK pension framework. Mr Loney said: “This so called ‘ISA-style’ tax treatment of pension contributions could pose considerable risk to the government’s aim of creating a savings culture in the UK.” At present, tax relief is given on pension contributions upfront as an incentive to keep money locked away until retirement. The contributions are then taxed when they are taken. Mr Osborne indicated in last month’s budget that he is open to the idea of reversing this system so that pension contributions are made from taxed income but are tax free when withdrawn. “We need people to believe a future chancellor, who’s probably in school right now and won’t be in power for another 30 years, will uphold this policy,” Mr Loney said. “Are people really going to believe that they will able to take money tax free out of their pensions at a future point in time — or will they save less?”
Mr Loney, who confirmed earlier this month that his company had recruited former pensions minister Steve Webb as an adviser, added: “There is no evidence that the promise of tax-free income, 25-30 years into the future, would be believed by the public given the volume of changes to the pension system over the last 25 years. “Consequently there is a real risk of a significant fall in savings, which are already too low in the UK. The pension proposal would also create a parallel system which is wholly incompatible with people’s existing pension arrangements, would take years to develop and would increase the overall cost of pensions.” Mr Loney’s comments echo those made by Ros Altman, the newly appointed pensions minister, who warned last month that taxing pensions in the same manner as ISAs could be “dangerous” for retirees.
“I do fear that making pension withdrawals tax free at a relatively young age (60s and 70s is not old these days) offers dangerous incentives to stop locking the money in for later life. Policy must be mindful of offering the right incentives,” she said. The proposal, however, has the backing of Michael Johnson, a pensions expert who is influential in Conservative party circles and first floated the idea of taxing pensions like ISAs last year. Yet other pension professionals remain wary of the idea. Dave Roberts, senior consultant at investment consultancy Towers Watson, agreed that the plan is likely to face strong scepticism from the public. He said: “There’s been little stability within the pensions regime over recent decades and persuading the public that this time it will all be different won’t be easy.”
John Ralfe, an independent pensions expert, added: “The government’s consultation looks suspiciously like a sleight-of-hand to flatter its deficit reduction target, not a genuine reform to encourage long-term savings. “Isa-type treatment would be more complex in practice, as both systems would have to run in parallel for decades, and less efficient, as people would save less of their after-tax income.” Interim results on Tuesday showed Royal London’s profits had been boosted by the onset of greater pension freedoms, with strong sales of private pensions as savers are no longer required to buy an annuity, plus auto-enrolment products. Sales of individual pensions at the company rose 56 per cent to £947m in the six months to June 30, compared with the same period a year ago, while sales of group pensions were up 9 per cent to £1.2bn.