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Government moves to turn pensions into ISAs

'This could create yet another tranche of pension to be worked out in a different way'

9 July 2015

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The government has released a green paper which consults on an overhaul of the pension tax relief system. 

George Osborne announced in his emergency summer budget on 8 July that 'pensions could be taxed like ISAs' because 'Britain isn't saving enough'.

He told the Commons: 'You pay in from taxed income and its tax free when you take it out. And in-between it receives a top-up from the government.'

The announcement follows on from the pension freedoms which came into effect in April 2015, and drives forward the Tories' plan to make the nation more responsible for their own savings.

Osborne also cited increasing life expectancies and the complexity of the current pension tax relief system for the proposed changes.

He notes in the consultation paper: 'It is important that the support on offer from the government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.

Meanwhile Robert Young, a pensions consulting actuary at Gordon Dadds, suggests that instead of actually simplifying the pension landscape, the changes could create further confusion.

'Although this would be simpler starting from a blank sheet, given that many have pensions already in place and with the number of employees with pension arrangements growing, as a result of Automatic Enrolment, this could result in yet another change to how pensions operate and to pensions becoming even more complicated'.

He added: 'This could create yet another tranche of pension to be worked out in a different way'.

On the other hand, Gavin Moffatt, an associate at independent pension advisers, City Noble, believes the current tax relief system is 'worn-out' and has welcomed the proposal.

'Ask the man on the street about pensions and he says they're confusing. Ask him about ISAs and he says he understands them', he said.

'ISAs have been an unmitigated success story and it's about time we built on that model with a new pension ISA and a system of matched state contributions to replace the existing anomalous system'.

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