The Government has announced it will not publish its plans for reforming the way pension tax-relief is paid, until the Budget in March next year.
Many experts believe that the delay means the system will be radically overhauled, as the Government looks to cut spending and that some pension savers may have a short window before the tax-relief they receive is cut.
How does pension tax-relief currently work?
At present you can make a pension contributions each year equal to the higher of your income or £40,000, known as the Annual Allowance. All pension contributions receive 20% tax-relief at source, in practice this means that for each £80 contributed a further £20 is added.
Higher rate taxpayers can claim additional money back, taking the net cost of a £100 contribution to just £60. Additional rate taxpayers can claim even more.
The system of tax-relief is one of the most significant benefits of paying into a pension and planning for retirement, whilst the new Pension Freedom rules have simply added to their attractiveness.
However, the current tax-relief system costs the Government some £50 billion each year and is an obvious target as it looks for ways to reduce expenditure.
Speaking in the House of Commons, Chancellor George Osborne, said: “We are open to consultation on the pensions taxation system at the moment.”
However, most experts believe that change is inevitable and will have the greatest impact on higher earners.
One suggestion has been that relief for higher rate taxpayers will be cut to a flat rate of between 20 – 30%, whilst basic rate taxpayers could receive more.
Other options open to Mr Osborne include a reduction in the current maximum annual contribution of £40,000, or the removal of options such as Carry Forward, which allows unused allowances from previous years to be mopped up.
What action should you take?
Of course this is all speculation, at the moment there is no guarantee that the current system of pension tax-relief will change. However, the longer the delay in making a decision the less likely the status quo will be left unchanged.
So how should you react? The answer to that probably depends on your desire to plan for retirement and your tax status.
Basic rate taxpayers If you are a basic rate taxpayer you currently get 20% tax-relief on your pension contributions. There has been no speculation that this will be cut (of course there is no guarantee it won’t) indeed, some experts have suggested that the relief given to basic rate taxpayers could actually be increased, as an incentive to save for retirement.
So if you’re a basic rate taxpayer, and assuming you are not planning to make a large one off contribution which could be hit by a reduction to the Annual Allowance, it’s probably a case of ‘steady as you go’, with no need to make any radical changes to your retirement planning in the run up to next March.
Higher rate taxpayers It’s here that the Government is most likely to try and save, or indeed perhaps redistribute, tax-relief. Therefore, if you believe the rate of tax-relief may be cut, or other pension contribution options curtailed, it may be prudent to bring forward contributions and make them before March.
Of course, George Osborne may decide to make no changes, in which case you will have boosted your retirement provision, but you won’t be able to get access to your pension pot until 55 at the earliest, when 25% will be available as a tax-free lump sum (under current rules) with the rest subject to income tax.
We’re here to help
If you would like advice on your pension and the options available to you before the Budget in March, we are here to help.
Call Sarah or Bev today on 0115 933 8433 or email firstname.lastname@example.org, we will be happy to help.
The Financial Conduct Authority does not regulate tax advice. The levels and bases of tax relief are dependent on your individual circumstances are are subject to change.