Former pensions minister Steve Webb criticised George Osborne yesterday, claiming that the Treasury is plotting a “tax bombshell” which will hit thousands of British people.
According to the former minister, Osborne has plans to abolish the tax-free lump sum on retirement incomes in an attempt to raise up to £4 billion in lost revenue.
Steve Webb, who worked previously with the Chancellor on the coalition Government’s pension strategies, said that the current perk allowing over-55s to access 25% of their pension savings before tax is “heading for extinction” in the forthcoming March Budget.
Mr Webb believes that Osborne will scrap the so-called pension contribution tax relief, and replace it with a new ISA-style system.
“Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free — a hugely tax-advantaged way of saving,” said the former pensions minister.
“In effect, a quarter of the money in your pension never gets taxed at all under the current rules.
“But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes in to a pensions Isa has already been taxed, there is no equivalent of the tax-free lump sum.
“Given that the tax-free lump sum costs the chancellor around £4bn per year in lost revenue, it is easy to see why he might like to get rid of it. It is remarkable to think that one of the most popular and best understood parts of the tax system — the tax-free lump sum — could be on the brink of extinction without anyone noticing.”