Former UK pensions minister Steve Webb is continuing his crusade to call attention to the possibility that the Chancellor may replace the current pension regime with what is being called an “ISA-type” of pension, and in the process abolish the so-called pension-commencement lump sum.
In a 25-page report out today, Webb, (pictured), who is now policy director at Royal London, warned against replacing the UK’s current system of pension structuring with either a “Pension ISA” or a low, flat-rate of tax relief for all.
Such changes, he argues in the 25-page report, would mean that the UK would effectively end up “stealing” tax revenues from the next generation.
In a statement accompanying the unveiling of the new report, Webb said the March Budget could end up being “the biggest example of daylight robbery since the days of Dick Turpin”, adding: “A Pension ISA steals billions of pounds in tax revenues from the next generation, who will need the money to fund the public services of an ageing society. And if the Chancellor opts for a low flat-rate of tax relief, he will be stealing billions of pounds today from the support we give to hard-pressed savers.
“We need a reform which helps savers and offers simplification and stability, such as a generous flat rate of up-front relief, combined with the abolition of the lifetime limit on pension saving.
“Anything else would be a huge missed opportunity”.
As reported, Webb went public over the weekend, in a piece in The Sunday Times, with his views on the possibility that George Osborne would unveil the unexpected changes to the UK’s pension legislation in his Budget next month.
Currently, Britons with private UK pensions are allowed to access 25% of their pension pots tax-free in a single lump sum when they reach age 55, even though the money they placed in these schemes, and all subsequent earnings, were amassed tax-free.
Under an ISA-type of pension, a person’s earnings would be taxed before going into the pension, but not taxed when the pension fund holder started taking his or her pension savings.
Webb’s new report, entitled Pension Tax Relief: Radical Reform or Daylight Robbery?, notes that the radical “Pension ISA” idea is “superficially attractive to a cash-strapped Chancellor, giving him the chance to bring forward billions of pounds of tax revenue from the time when today’s workers retire to the present day”, while also building on “the relatively popular and simple ‘ISA’ brand”.
However, Webb continues, such a change “would be fraught with difficulties…would throw the whole system up in the air, with unpredictable consequences for the attitudes of employers and employees [towards the idea of] putting money into workplace pensions…[and] would require the ‘dual-running’ of pension systems for decades to come, as each individual held one or more pension in a ‘yet-to-be-taxed’ pot, and a new pension in an ‘already-taxed’ pot”.
It would also, he noted, “move tax revenue away from our children’s generation, when demographic pressures on public spending and the need for tax revenues are likely to be far more severe”.
“It would, in a sense, be stealing funding for the public services the next generation will need, for our own benefit”.