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Osborne Mulls More Changes To UK Pension Tax Relief

by Robert Lee,, London

27 November 2012

UK Chancellor George Osborne is thought to be mulling an overhaul of the tax relief available to annual pension savings, a move that experts have warned will add to mounting uncertainty over the tax regime.

According to reports, Osborne may use his forthcoming Autumn Statement to signal a cut in the maximum that can be paid into a pension in a year and still receive tax relief. At present, the tax-free threshold stands at GBP50,000 (USD79,565), but the Chancellor is understood to be planning a reduction to GBP40,000 or even GBP30,000. Before the coalition entered into power, the annual allowance stood at GBP255,000.

Reacting to the reports, Marc Hommel, pensions partner at the accountancy firm PwC, warned that further cuts in the tax reliefs available on annual pension savings would have significant consequences. He anticipates that employers would seek to further accelerate the closure of defined benefit pension schemes, which would become more complex and expensive to run. The disinclination to continue such schemes would be magnified by what Hommel calls "fatigue with constant changes to the tax treatment." In turn, there would be reduced employer and employee savings into retirement arrangements, Hommel believes.

Hommel is also concerned that the changes will affect all employees, rather than just higher earners. He explained that: "With recent uncertainty over the tax regime and other features such as auto-enrolment currently being implemented, business and employees alike need a sustained period of minimal changes to the pensions regime."

His colleague Alex Henderson, tax partner at PwC, believes that reducing the allowance could in addition penalize those who deliberately planned to increase pensions savings later in life.

More broadly, Hommel is worried that trust in the robustness of the pensions savings landscape will continue to erode, and Henderson concurs that further tinkering with the system will undermine confidence in its stability.

Osborne's proposals must be presented to the Office for Budget Responsibility by November 28 and the Autumn Statement will be delivered to parliament on December 5. The Treasury has not commented on the reports.

TAGS: tax | investment | pensions | tax incentives | employees | retirement | United Kingdom | tax thresholds | tax breaks | tax reform

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