George Osborne's pension reforms
will backfire and end up costing the taxpayer billions of pounds more
every year as people stop saving for their retirement, the official
Treasury watchdog has warned.
The Office for Budget Responsibility said the removal of tax relief on pensions for higher earners - billed as a move to save money - will ultimately end up costing the Exchequer £5 billion a year.
The Government controversially cut the amount people can save in a
pension to £1m through their lifetime. The annual allowance was also cut
to £40,000 - despite cuts in interest rates and stock market returns
which combined to decimate the value of life savings.
The move was condemned by business groups and pension experts at the time who said it would deter millions of people from saving.
Theresa May is now under pressure to reverse the policy in the forthcoming Autumn Statement after the OBR warned it would also undermine public finances in the future.
Tom McPhail, head of pension policy at Hargreaves Lansdown, said: "The Government urgently needs to rethink its savings policies.
The Office for Budget Responsibility said the removal of tax relief on pensions for higher earners - billed as a move to save money - will ultimately end up costing the Exchequer £5 billion a year.
The watchdog warned that higher
earners will move their money to tax efficient investments and may even
drive up property prices as a result of the ill-thought through policy.
The move was condemned by business groups and pension experts at the time who said it would deter millions of people from saving.
Theresa May is now under pressure to reverse the policy in the forthcoming Autumn Statement after the OBR warned it would also undermine public finances in the future.
Tom McPhail, head of pension policy at Hargreaves Lansdown, said: "The Government urgently needs to rethink its savings policies.
"In the short term fiscal changes such as the lifetime allowance cap
at £1m will save it money, however in the longer term the package of
various measures such as the pension freedoms, the increased Isa limits
and the secondary annuity market will result in a worsening of public
finances.
"Investors will simply substitute more tax advantaged products such as the Isa for the pensions where they fact the lifetime allowance cap." The OBR's analysis looked at a series of cuts to tax breaks on pensions savings for high earners since 2010, together with the impact of George Osborne's new pension freedoms.
The Government has reduced the annual pension allowance, the amount people can put into their retirement pots before they have to pay tax, from £255,000 in 2010 to £40,000.
It has also cut the lifetime allowance from £1.8million to £1million today.
Over a million middle to high earners including teachers, doctors, lawyers and managers will have their retirement savings restricted as a result of the lower pensions lifetime allowance.
"Investors will simply substitute more tax advantaged products such as the Isa for the pensions where they fact the lifetime allowance cap." The OBR's analysis looked at a series of cuts to tax breaks on pensions savings for high earners since 2010, together with the impact of George Osborne's new pension freedoms.
The Government has reduced the annual pension allowance, the amount people can put into their retirement pots before they have to pay tax, from £255,000 in 2010 to £40,000.
It has also cut the lifetime allowance from £1.8million to £1million today.
Over a million middle to high earners including teachers, doctors, lawyers and managers will have their retirement savings restricted as a result of the lower pensions lifetime allowance.
While the reforms will benefit
the economy in the medium term because of increased tax, in the longer
term there will be a cost to the taxpayer as people choose to invest
their savings in alternative schemes, the report found.
The OBR said that by 2035 the Government's policies will cost it £5billion a year in lost tax revenue.
It states: "In recent years, the Government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products.
"In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive - particularly for higher earners - and non-pension savings more attractive - often in ways that can most readily be taken up by the same higher earners."
Under the Coalition Government Mr Osborne also increased the amount people can save in Isas, which led to more people using them to save. The value of adult ISAs had risen from £287billion in 2006 to £518billion.
As a result, wealthy savers are expected to max out newly increased £20,000 a year Isa limits instead of saving into pensions where the tax benefits are starting to look far less attractive.
The OBR said that by 2035 the Government's policies will cost it £5billion a year in lost tax revenue.
It states: "In recent years, the Government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products.
"In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive - particularly for higher earners - and non-pension savings more attractive - often in ways that can most readily be taken up by the same higher earners."
Under the Coalition Government Mr Osborne also increased the amount people can save in Isas, which led to more people using them to save. The value of adult ISAs had risen from £287billion in 2006 to £518billion.
As a result, wealthy savers are expected to max out newly increased £20,000 a year Isa limits instead of saving into pensions where the tax benefits are starting to look far less attractive.
However the report warns that:
"If interest rates were to increase towards historically normal levels,
the amount of tax forgone on interest income would increase", adding to
the long-term cost of the policies.
The watchdog warned that the Government's assault on pension savings means house prices could rise because more people are investing in housing as a result.
It said: "Measures that change the relative incentive to save, whether in savings or pensions, will also affect the attractiveness of other investments such as housing.
"A number of the measures we cover in this paper could affect the housing market, mostly by increasing demand for housing and putting upward pressure on house prices."
Culled from Telegraph
The watchdog warned that the Government's assault on pension savings means house prices could rise because more people are investing in housing as a result.
It said: "Measures that change the relative incentive to save, whether in savings or pensions, will also affect the attractiveness of other investments such as housing.
"A number of the measures we cover in this paper could affect the housing market, mostly by increasing demand for housing and putting upward pressure on house prices."
Culled from Telegraph
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