• 'I nearly fell out of bed' – experts shocked by pensions U-turn

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  • 7 Mar 2016
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Chancellor scraps overhaul of pensions tax relief ahead of next week’s budget

An overhaul of pensions tax relief has been reportedly shelved by the chancellor ahead of next week's budget, but pensions experts believe the issue is likely to resurface at a future date.

The scrapped plans include the 'pension ISA', which would give tax-free pension withdrawals for those over the age of 55, and a new flat-rate of tax relief, which would benefit lower earners and negatively impact higher earners.

Raj Mody, a partner at PwC, said he was surprised to hear the chancellor's potential plans had been abandoned. "I heard it first on the Radio 4 news late on Friday and I nearly fell out of my bed. I thought 'really? He is going to put that whole thing on hold?'

"The fundamental issue won't go away, so this decision allows the government to carry on working behind closed doors to formulate their proposals, and liaising with industry to iron out the complexities. I think it will re-emerge another day."

David Robbins, senior consultant at Willis Towers Watson, agreed: "We thought it more likely than not that there would be change. How long has it been shelved for? I think it might have been parked for a while but that doesn't mean forever."

While the potential overhaul may have been put on hold, Robbins believes there could still be some "tinkering around the edges" in the upcoming budget. "It doesn't rule out changes to national insurance relief to employer contributions – something could happen there," he said.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said there was still plenty of "wriggle room" for changes in the budget. He said there could still be announcements around the annual allowance, which is currently £40,000 after being cut from £50,000, down from £255,000 in 2011. There could also be further changes to the lifetime allowance, the annual allowance taper and to salary sacrifice on pensions contributions, he said.

"National insurance exemption on pension contributions costs the chancellor around £15bn a year,” added McPhail. “This may well prove a very tempting target; however, it would be hugely unpopular with employers and would cause substantial administrative upheaval for payroll managers."

PwC's Mody said there was a "whole raft of tax issues around pensions that need addressing", including the tapered annual allowance.

He added: "It may only affect a small proportion of the population, but the trouble is that you create negative noise in the system about pensions savings, including from the higher earners, who are the company executives and would otherwise be responsible for making sure good pensions arrangements are sponsored.

"The noise affects sentiment, even down to lower earners. It is not viable to pick at a segment of the population and not expect there to be some collateral damage right across the earnings scale.

"There is loads to do. We have hardly seen the end of the story when it comes to pensions tax relief – it just appears that nothing radical will be launched when it comes to this budget."

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  • This contrasts sharply with employees being informed about the National insurance contribution increase 1 April 2016 which is related to the introduction of the new State Pension also effective from 6 April.