Weekend media reports suggest that the Chancellor has changed his mind about dramatic changes to pension tax relief, but, says Head of Retirement Policy at Hargreaves Lansdown Tom McPhail, there is still plenty of wriggle room.
McPhail comments: “The nature of the briefings suggests that the Treasury would now find it very difficult to make any significant changes to pension taxation without suffering a significant dent to their credibility but there is still plenty of wriggle room for changes in the Budget. Given that the need to raise money hasn’t gone away, pensions must still represent a tempting target. This does look like a stay of execution and investors should still take advantage of higher rate relief while some certainty remains.
The Chancellor could:
- Reduce the Annual Allowance
- Reduce the Lifetime Allowance
- Extend the Annual Allowance Taper
- Restrict salary sacrifice
The Annual Allowance
The AA is currently £40,000, having been cut from £50,000 and down from £255,000 in 2011. For many people, a sum of £40,000 a year looks more like an annual salary than a pension contribution, however for higher earners, those who have left their pension funding until late in their careers and for older members of final salary pension schemes, this is already an uncomfortably low ceiling. That might not stop the Chancellor from bringing it lower though.
The Lifetime Allowance
The LTA has been progressively slashed, down from £1.8 million in 2011, to just £1 million (from 06.04.2016). Many in the pensions industry have called for it to be scrapped altogether however the Treasury has found this a useful mechanism for progressively restricting the overall amount investors can build up in their pensions.
The Annual Allowance Taper
From 06.04.2016 this will progressively restrict the Annual Allowance for those with adjusted incomes in excess of £150,000. For those over £210,000, their Annual Allowance will be just £10,000. He could move these thresholds down, bringing more people into the taper.
Restrict salary sacrifice
The practice of channelling individuals’ pension contributions through their employer to save National Insurance is widespread and popular, around 70% of company pensions use this. The National Insurance exemption on pension contributions costs the Exchequer around £15 billion a year. This may well prove a very tempting target, however it would be hugely unpopular with employers and would cause substantial administrative upheaval for payroll managers.
What should investors do?
Investors, particularly those who pay higher rates of income tax, who want the certainty of benefiting from the pension tax system in its current form, should make the most of their allowances and opportunities while they still can. We may see a further consultation paper in the Budget, or we may simply get confirmation that plans have been put on hold. This does look like a stay of execution rather than a cancellation though.
Help for the WASPI campaigners
The WASPI campaigners want the government to help out the women born in the 1950s who are affected by the changes to the state pension age. In spite of several parliamentary debates and a petition with well over 100,000 signatures, the government has resisted all demands for any policy change or compensation. Could the Chancellor use the Budget to unveil some kind of bailout scheme? We think it is unlikely but let’s be honest, making any predictions about pensions at the moment is challenging.
Cutting income tax
George Osborne would like to cut income tax. Only a couple of weeks ago the HMRC published data showing that the April 2013 reduction in the top rate of income tax from 50% to 45% had generated an extra £8 billion in tax revenue. Cutting income tax rates would play very well with the Tory heartlands. Maybe he’ll do it in this Budget, maybe he won’t. The most likely change is a shift of the thresholds.
Any changes to income tax rates would automatically affect tax relief on pension contributions.
The self-employed are getting left behind when it comes to pension planning. Their participation in the pension system has collapsed as their numbers have increased in recent years; there are now around 4.5 million self-employed workers in the UK, of whom only around 10% are currently contributing to a pension. It may not be the Chancellor’s top priority right now, but this group of workers clearly needs some help in getting on top of saving for retirement.
Non-earners pension allowance
Introduced at a healthy level in April 2001, the non-earners pension allowance of £3,600 has remained frozen ever since. Had it been inflation linked it would be 50% higher at £5,410. This is a valuable way for stay-at-home parents and careers, children, students, and other non-earners, to put something away for their retirement and is long overdue an upgrade.”