Hammond's predicted pensions tax grab forgets one thing

The chancellor has hinted heavily that he's looking at reducing tax relief on pension savings in the upcoming budget.

But he's forgotten something. Since 2015, under the pension reforms that brought in freedom for pensioners, the usual arrangements in retirement are that people draw down on the capital of their pensions. The majority of these draw downs are taxed as income.

So the pensioner is taxed on withdrawing their money out of a pension that they've saved for. This was something we could live with when there was tax relief on the initial investment, but if he goes through with it there will be a significant penalty for saving for a pension compared to simply investing outside of a scheme.

Compare the two scenarios, where you invest £1,000 per month, either in a pension or through a stocks and shares ISA. Let's assume that you achieve good growth in each investment, and after 30 years this is worth £1m

With the ISA, this amount is yours to spend as you like and there is not a single penny in tax payable.

With a pension, 25% of it is tax free but the rest is taxed as income as you draw it down, so let's assume you pay 20% tax on it, that's a cost of £160,000. Without the tax relief on the initial contributions this looks like a bad idea. By the way the basic rate pension tax relief would have been around £90,000, so the treasury is still up. Remember that for most of us we save for a pension out of already taxed income.

You can invest your money in the same things through a stocks and shares ISA as you can in a pension.

If the pension tax relief goes then it will be the end of pensions, who would suffer this type of penalty? Imagine if you had to pay tax to draw your own money out of your savings account - this would be the reality if pension relief was abolished.

Call me cynical but I think the tax charged on the draw down from pensions has been conveniently forgotten