Has Budget sounded the death knell for pensions?
After pension freedom, annuity sales and pension tax relief cuts, you would be forgiven for thinking that the government couldn't change pensions anymore. But you'd be wrong.
Following another radical Budget, the first true blue one for 18 years since then chancellor Ken Clarke took to the stage, chancellor George Osborne has put forward a consultation to effectively end pensions as we know them.
The green paper is asking for opinions on whether we should bring the taxation of pensions in line with ISAs. At the moment, pension contributions are untaxed, the government provides a top up in the form of relief, the growth in pension investments is tax-free and when you get to retirement the income you take from the pension is taxed. This is known as exempt-exempt-taxed.
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ISAs are the opposite; contributions are paid from your wages after income tax has been paid, growth on ISA investments is tax-free and withdrawals from your ISA are tax-free too. This is known as taxed-exempt-exempt.
Osborne is looking at flipping pension taxation on its head to mimic ISAs, with a little top up (which is tax relief currently) thrown in in the middle.
This is an idea that has been floating around for a while thanks to pensions expert Michael Johnson who works with the Centre for Policy Studies. He has long called for pensions and ISAs to be merged to create a super wrapper that would stay with someone from cradle to grave.
What the green paper is proposing is a step on the road to Johnson's dream and it makes a lot of sense. The fact is, pensions are complicated and boring, they lock your money away until an age that you can't even comprehend being when you're 25.
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ISAs on the other hand are the often dubbed the nation's favourite savings vehicle because the nation gets them. ISAs are easy to understand. You put your money in, any money you make is tax-free and you can take your money out when you want. Even though you don't get a top up from the government, you'll still find that many people prefer ISAs over pensions just for simplicity's sake.
Whether the government would go as far as Johnson wants and allow you to dip into your super ISA through your lifetime is yet to be seen but the fact that it is even consulting on the future of pensions shows that politicians realise just how out-of-date and unappealing this dinosaur savings plan is.
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