I returned to work from a holiday in India on Saturday and whilst I was away and thanks to today’s efficient mobile technology I could not help but notice the gathering momentum of George Osborne’s desire to overhaul the pension system yet again with the introduction of a new Pension ISA and the withdrawal of higher rate tax relief on pension contributions – possibly from Budget day!

This of course would have a serious impact on both individual retirement planning and corporate pension strategies and from a client perspective I fast realised that I could not have been away from the office at such a bad time.

Being overseas, it was difficult to determine whether this tidal wave of speculation was media driven, organised disinformation or Government leakage – perhaps it was a combination of all three. But guess what – on the day I return it is announced that the Chancellor has decided to shelve any such changes and all my holiday worries were for nothing …. Or were they?

The announcement of such radical change at very short notice signifies that much consultation behind the scenes had already taken place and the allure of a potential saving to the Treasury of c. £20 billion a year just from the withdrawal of higher rate tax relief was clearly driving Osborne’s thinking. The introduction of a Pensions ISA that would broadly work as a normal ISA but with a minimum withdrawal age and the ability for companies to contribute is even more radical.

Enter the EU Referendum (also announced during my holiday – thanks Dave!) and the possible Brexit! Clearly, with Boris and a handful of ministers off-page the Government needs all the support it can get and a growing backlash from Conservative MPs including the influential 1922 committee appears to have been decisive in Osborne making his U-Turn.
The former pensions minister Steve Webb termed the changes as ‘’Osborne’s Gordon Brown moment’’ referring to Brown’s £7 billion a year tax raid on pension funds.

Richard Parkin, head of pensions at Fidelity said the threat of radical change to pension tax relief appeared to have receded. “We would still urge consumers to make the most of the current system while it is still in place. This is a postponement and not a cancellation of change,” he said.

So what is RetireEasy’s take on all of this? – Well we very much agree with Richard Parkin’s assertion that the proposed changes and particularly the scrapping of higher rate tax relief is a postponement and unless there is a dramatic turn round in the Government’s finances, a £20 billion tax saving each year is likely to prove irresistible for the Treasury to gather in and paying in contributions now under the current system is likely to prove more advantageous than any new system that is implemented.

It is also worth pointing out that the income threshold before paying higher rate tax has been reduced in recent years so far more ‘’middle earners’’ now pay tax at 40% and so, therefore, can obtain 40% tax relief when paying in pension contributions. Of course there are so many other factors to consider that we strongly recommend anyone considering making or increasing personal pension contributions to seek professional advice first.

At RetireEasy we believe the complete replacement of the existing pension system with a pension ISA could backfire with no clear incentivisation at source for people to save for their retirement. By the same token the ability for individuals to withdraw the whole of their retirement savings as a tax-free lump sum on the day of retirement could create a huge additional burden on the State in the future.

What is puzzling is that the proposed changes come so soon after the ‘’good news’’ story of pension freedoms that were implemented under Steve Webb’s (LibDem) tenure! The sceptic in me suggests that Osborne’s thinking centres on ‘’If it sounds too good to be true it probably is’’