Middle-class savers are to lose thousands of pounds of tax relief when saving for a pension but will not have to pay tax when they retire, under radical plans set to be unveiled in the Budget.
The controversial proposal will mean that higher-rate taxpayers will lose valuable tax perks during their working lives. However, they will be able to withdraw their lifetime savings tax-free after retirement.
The proposal has sparked a Government row with the pensions minister warning that it threatens to undermine the system by removing the tax incentives for pensioners to keep money in their pot. It would allow George Osborne, the Chancellor, to save more than £10 billion annually in the coming years – although tax receipts would then fall in decades to come.
The extra money could allow Mr Osborne to reduce higher rate tax or increase the tax-free personal allowance. It will also allow him to clear the deficit.
There never will be a stable pensions system. Simply because politicians hold office for a decade at most and pensions are saved for and then drawn down over an entire adult lifetime. This causes an incentives mismatch. Any system of reliefs and or taxation which encourages significant savings then becomes an irresistible pot for some future Chancellor to raid.