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20 Jan 2016

Osborne preparing to launch raid on retirement savings

Chancellor George Osborne is planning another shake-up to the pensions system ahead of this year´s March budget; but this time in relation to how pensions are taxed, City AM reports.

In what´s expected to be the biggest transformation of the way pensions are taxed in a generation, the government is planning to abolish the existing tiered tax relief system.

Under the current system, when a basic rate taxpayer pays 80 pence into their pension, the government adds an additional 20 pence - matching their 20% income tax rate. For those on higher or additional rates, the government pays a 40-45% top-up.

This means that pensions tax relief is costing the Treasury some £21 billion in pension tax relief a year, 56% of which is made up of the higher rate payers.

But upcoming changes, announced following a consultation period on pension tax, mean that a single flat-rate will soon be introduced. This will bring an end to the controversial pattern of those on higher incomes being rewarded more generously for saving for their retirement.

The most likely figure for the new single rate is 33%, say experts. This will save the government more than £2 billion per year, and although it means lower earners will receive a more handsome top-up to their savings, it also means those on higher rates stand to lose out.

Commenting on the plans, David Smith from Tilney BestInvest told the publication: “Quite simply, higher earners have never had it so good in terms of pension tax reliefs but the sun looks like it is going to set on the golden age of pension tax relief.”

It is expected that the changes will be put into force 12 months after the Budget announcement, so that those in the industry have time to get prepared. Higher and additional rate tax payers are being advised to use up their full £40,000 maximum annual allowance before the changes are implemented.

Copyright M2 Bespoke 2016

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