The biggest pensions shake-up in a century: how will it affect you?-By Katie Morley and Dan Hyde

Last year’s reforms were hailed as a radical overhaul of retirement savings, but even more dramatic changes lie ahead

The Chancellor is planning to save billions for the Treasury by changing tax relief on pensions, according to the former pensions minister Photo: Getty Images

Savers will be asked to give up billions of pounds of tax relief they have received on their retirement funds under a tax grab being prepared by the Government, the former minister for pensions predicts today.

Steve Webb, a prominent member of the coalition government until May, warns that people who have been “saving for decades” are the ultimate target of an inquiry announced two weeks ago.

The Treasury is considering re-writing the tax rules on pensions that currently ensure savers are charged only when they withdraw the cash after age 55.

In future, pensions could become almost identical to Isas – taxed up front rather than on withdrawal – albeit with a bonus to reward people for setting aside money for the long-term.

Commentators claim this would be one of the most far-reaching changes to pensions since the concept of mass retirement saving was first introduced by David Lloyd George, with the support of Winston Churchill, in the “people’s budget” of 1909.

Based on half a decade working closely with George Osborne, Mr Webb also believes the proposals under consideration could see millions of savers given the promise of no further taxation if they give up a chunk of their fund to the Exchequer in the first place.
Although George Osborne has said he will approach the issue with an “open mind”, Mr Webb says his former colleague is eyeing a “once-in-a-generation” chance to collect tax on money that would otherwise have been locked out of the Treasury’s reach for decades.
Writing for Your Money (page 10), Mr Webb says: “Instead of giving tax relief throughout a working life and only gradually receiving tax through the decades of retirement, a “pensions Isa” would allow the Chancellor to tax income as soon as it is earned, though foregoing taxation in decades to come.”
“The biggest prize of all would be to unlock the untaxed wealth in the pension funds of those who have been saving for decades.
“My suspicion is that a reform affecting the millions already saving into a pension is what the Chancellor is really interested in.”
Everyone from large pension companies to consumer groups, think tanks and readers of The Daily Telegraph can submit views to the 13-week consultation on tax relief reforms that began earlier this month.
Mr Webb, himself the architect of pioneering policies such as the new “flat-rate” state pension, said the Chancellor will be waiting to see “who can come up with the best idea for bringing forward the most revenue with the lowest political cost”.
Here, Your Money breaks down why, how and for whom pensions taxation could change – and the potential implications of Mr Webb’s insight on the Chancellor’s predilections...

Why would the Government change the system?

George Osborne says he wants to change the system to encourage people to save more, but this is only part of the story. The primary reason is to save money because the pension system as it currently stands is too expensive (see Personal Account, right). By removing tax relief on pension contributions and allowing people to withdraw their money tax-free instead he could release billions to spend elsewhere today – such as paying off Britain’s burgeoning debt mountain.

How would this potential new system work?

According to Steve Webb, instead of savers pocketing tax relief throughout their working life and then only gradually paying tax back over the decades of retirement, pensions could be treated more like Isas.
This would allow the Chancellor to tax all income as soon as it is earned.
He says there would have to be some remaining incentive to encourage pension saving, but a potentially on a smaller scale.
This could be a flat rate of tax relief at, say, 33pc, replacing the current system in which basic rate taxpayers get 20pc relief and higher rate taxpayers get 40pc. Effectively, it would be the Government giving £1 for every £2 saved.
Under the current system you pay £120 into a pension and get £30 paid in by the Government, making a gross contribution of £150. As a higher rate tax payer, you get a further £50 offset against your tax bill via your tax return.
Say instead relief was at 33pc, a £120 contribution would be topped up to £180 – with nothing further for higher-rate taxpayers.
It is also thought that the current 25pc tax-free lump sum, available when savers take their pension, may be removed or reduced.

What about the pension money we’ve already saved?

This is the potential bombshell. Mr Webb thinks the Chancellor would want to encourage savers to hand back tax relief they’ve already enjoyed, in return for the promise of future tax breaks when they spend their savings.
This could involve savers having to make highly complex calculations as to whether they would be better or worse off. Equally importantly, savers would also need to trust successive governments to uphold the future tax promises.

How to get the most out of tax relief now (while it lasts)

If you’re in a work pension scheme, you need to find out how much you can contribute per year and consider investing up to the maximum. Most schemes let you contribute a maximum of 10pc to 15pc of your annual salary. If you’ve reached the maximum and have further money to invest you can utilise the rest of your annual allowance (£40,000 for this year, plus any unused allowance for the past three years) in a private pension. If you don’t have one you can set up a self invested personal pension (Sipp) cheaply via an online broker. However if you do this and you’re a higher rate taxpayer, you’ll have to claim back the extra tax relief through a self assessment form. Here’s how it works:
1. You make a payment into your pension pot. For ease of calculation, say you pay in £800.
2. Your pension firm boosts your contribution by the 20pc basic rate tax relief.
Most big providers add the basic rate of tax relief instantly, so in this case your pension pot gets £1,000 (in other words, your contribution is boosted by 25pc).
3. Your pension provider then goes to HMRC and claims that money back on your behalf.
4. If you are a higher-rate taxpayer, you claim the extra 20pc back through your self-assessment tax return. There is a box on the form where you can declare the gross pension contribution (in the above example, £1,000).
But when would you do it? If you are now getting down to filling in your tax return for the year ending April 2015 (which you can send in at any time between then and the deadline on January 31, 2016) you will be including any contributions made during that period.
Equally, if you make a payment into a pension between now and April 5, 2016, you would include it on the return for this tax year, where the deadline would be January 31, 2017.
Culled from Telegraph