Pensions: New pension threat on the horizon?


Speculation grew in the media today that the Chancellor, George Osborne, is planning yet another change to pension’s legislation which could affect thousands of people’s retirement planning.

In his effort to reduce spending and raise additional revenue it seems as though Mr Osborne is once again looking at reducing the tax breaks offered to those people carefully planning for their retirement.

Pension contributions attract tax relief, making them an attractive option for investors but costing the Treasury around £20 billion last year, making it an obvious target.

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Annual Allowance reduction?

The Financial Times has reported that the Treasury is considering reducing the Annual Allowance, and therefore restricting further the amount which can be paid into a pension and therefore the level of tax relief.

The Annual Allowance is the amount each person can pay into their pension and receive tax relief on. For example if a basic rate tax payer pays £80 into a pension, the tax relief takes the contribution to £100; a 40% tax payer could claim an additional £20, taking the net cost down to £60.

In April 2011 the Annual Allowance was cut dramatically from £255,000 to £50,000, however if the stories are correct the Chancellor is considering a further cut possible to £40,000 or even lower, to £30,000.

It has long been a Liberal Democrat policy to cut higher rate tax relief for pension savers and it seems as though reducing the Annual Allowance might be some sort of ‘deal’ between the two coalition partners.

The Financial Times reports that lowering the threshold would raise £600 million, whilst a more dramatic cut to £30,000 would raise £1.8 billion in much needed funds, although the Treasury declined to comment on the specific issue of reducing the Annual Allowance.

Eroding trust

However, pension experts, including our own Phillip Bray, Marketing Manager here at Investment Sense, warned that making these changes would come at a price.

Experts believe that the constant tinkering with pension legislation only serves to further erode trust in pensions and that a reduction in the Annual Allowance would not just hit the wealthy, but also others, including members of Final Salary pensions on relatively modest salaries.

Phillip Bray, of Investment Sense told the Financial Times: “The £50,000 annual allowance has already been reduced significantly, and has in the main hampered those people with fluctuating earnings or women who want to make good the years when they have missed out on making pension payments whilst raising a family.”

Pension planning

Speaking to the Telegraph George Bull, of Baker Tilly, chartered accountants, said: “Fears that higher rate tax relief on pension contributions would be scrapped have proved misplaced in the past but there are good reasons to believe that this year might be different.”

He continued: “While I have tended to discount such speculation before budgets and autumn statements over the years as attempts by the pension industry to drum up business, there can be no doubt that the Government is under more pressure to raise revenue now than it has been in the past.”

Whilst the reports may just be speculation at the moment, with no firm evidence that the Annual Allowance will be cut, people planning on making large pension contributions may be want to considering bringing these forward to before the autumn statement on the 5th December.

Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK.

If you think you might be affected by this story and would like advice on your options, call one of our IFAs, today on 0115 933 8433, alternatively enquire online or email