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Tuesday, February 16, 2016

Tories target pensioners

The Telegraph reports that middle-class savers will be "actively discouraged" from putting money in their pensions if George Osborne pushes ahead with plans to cut tax relief for high earners.

They say that the Chancellor is considering plans to scrap higher rate tax relief on pensions and move towards a "flat rate", which could be as low as 25 per cent:

An analysis by the Institute for Fiscal Studies suggests that if he goes ahead with the plans in his Budget next month tens of thousands of higher-rate taxpayers will be better off investing in Isas or larger homes.
It warns that for the first time people who expect that they will still be higher rate taxpayers when they retire would be better off putting their money in an Isa.

At present nearly 300,000 pensioners pay the higher rate of income tax, meaning their annual earnings from their retirement pot is over £42,385.

The think-tank have produced a detailed analysis that shows that the Tories will be reducing options for better-off pensioners who, for all intents and purposes, may be natural supporters of the party:

At present basic-rate taxpayers receive a £20 top-up from the Government for every £80 they pay into a pension.

Higher rate taxpayers, classed as those earning more than £42,385, receive £40 for every £60, while top-rate taxpayers receive £45 for every £55.

Under plans being considered by Mr Osborne for a flat rate relief of 25 per cent for all, savers will receive £25 for every £75 they contribute. The move could save the Treasury an estimated £6 billion.

The IFS analysis says that at present pension savings are one of the best investments as they are effectively subsidised by the Government, with a tax rate of -21 per cent for higher rate taxpayers.

However a 25 per cent flat rate or relief could see pension contributions taxed at 9 per cent, leading to a significantly poorer return than other savings options.

The analysis says that someone saving into a pension would need to invest an extra 7p for every pound to achieve the same return as an Isa.

The report states: "If the higher rate relief were less than 30 per cent, higher-rate taxpayers who expected to pay the higher rate in retirement as well would be actively discouraged by the tax system from making employee contributions.

"As far as tax is concerned, they would be better off saving for their retirement via an Isa or a more expensive home."

This will not go down well with Tory MPs, once they understand the full implications of these changes.
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