MILLIONS of savers across the UK will be hit by a “stealth tax” contained in the small print of Chancellor Philip Hammond’s Budget, raking in more than £500 million for the Treasury, it has emerged.
Sir Steve Webb, the former Pensions Minister, pointed out how the tax take was buried in the Treasury’s Red Book and will affect those with savings products such as endowments and 'whole of life' policies with insurance companies.
While it will only hit people for around £50 a year, given it will affect millions of savers, it will bring in a large amount of money for the Exchequer.
Now director of policy at the pension and investment provider Royal London, Sir Steve said: “This is a tax raid on ordinary hard-working savers. What sounded like a technical Budget change will take millions of pounds from people who have been faithfully saving for years.”
Currently, insurance companies have to collect tax for the Treasury when investments go above inflation. However, the change means that from next year, tax will be payable on the whole return, up to and beyond inflation.
“This is not a tax on fat cats or City firms but on people who have done the right thing and made sacrifices. The Government needs to think again about this policy,” insisted Sir Steve, a former Liberal Democrat MP.
Royal London has calculated the move could affect up to three million of its own policyholders and many millions more across the whole insurance sector.
However, Treasury sources said the move was meant to bring into line the treatment of capital gains by companies with those of individuals.
They pointed out how insurance companies could choose to pay the tax themselves rather than the cost being borne by their customers.
The freezing of the indexation allowance on Corporation Tax will bring in £525m by 2023.
Meanwhile, MPs have launched an inquiry into how retirement savings plans, which are common in countries such as the Netherlands, Denmark and Canada, might work in the UK.
The Commons Work and Pensions Committee will look at whether "defined ambition" pension schemes could help tackle retirement savings problems.
This type of scheme is regarded as a middle ground option between defined benefit schemes such as final salary pensions, which promise savers a certain level of income when they retire, and the increasingly common defined contribution pension schemes, where savers bear the risk of how much retirement income they will end up with.
Defined ambition schemes have a target or ambition amount they will pay out, based on a long-term, mixed risk investment plan.
They aim to pay out an adequate level of index-linked pension for life - but this is an ambition rather than a contractual guarantee.
Labour’s Frank Field, who chairs the committee, said: "What the select committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could instead club together and pool the risk themselves."
The committee is inviting evidence on questions such as whether savers would understand and trust income "ambition" and whether there is an appetite among employers and the UK pensions industry to deliver such schemes.
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