Personal Investing
Ed Monk 14 Nov 2017 03:24pm

Budget 2017: a threat to pension perks?

Chancellor Philip Hammond will have multiple competing interests to satisfy when he delivers his Budget next week

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Caption: Pension tax relief means that contributions are helped by money that would otherwise have gone to the tax man.
Not only does he need to keep spending and borrowing on track to meet deficit reduction targets that are already slipping, he is also expected to produce measures that can shore up the Government’s sliding popularity after its faltering election campaign earlier this year. There is also the need to address inter-generational disparities and the obstacles that younger people face if they want to secure the same financial advantages as those that came before them.

The housing market is an obvious place to start, but another area that may get attention is the pension system, and the tax perks the government offers to get us to save for our own retirement.
At the moment, pension tax relief means that contributions are helped by money that would otherwise have gone to the tax man.

A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return. Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest.

From a tax point of view, all this makes a pension potentially the most advantageous place to save and invest your money.

The biggest relative benefit comes for those whose income in retirement puts them in a lower tax band than was the case during their working life and, because the system is linked to the income tax you pay, it is more generous overall to higher earners.

That could make it an attractive target for a Chancellor looking to raise money, and it has the added appeal that the people benefiting the most currently are likely to be older and richer, so any windfall for the Treasury could be refocused to help younger people and lower earners.

Such a change is possible- the Government has previously consulted on whether the system of tax relief is working properly - but it would mean a major overhaul of the system and constitute a surprise next Wednesday.

Perhaps more likely are smaller changes to the myriad rules, allowances and thresholds that govern the pension system.

One such reform could be to make the ‘Annual Allowance’ for pensions less generous. Currently, we can each save a maximum £40,000 into a pension each tax year. This level is a dramatic reduction on previous limits. It was once as high as £255,000 but has been slashed, first to £50,000 and then its current level.

Could it fall further? At £40,000, it’s only likely to be high earners who are affected by it and therefore may be deemed a politically acceptable cut to make.

If that does happen, it may not be the headline figure that is cut, but rather the inner working of something called the ‘Annual Allowance Taper’. This is a mechanism that potentially reduces the allowance from £40,000 to just £10,000 for those with qualifying earnings above £110,000.

The reduction is ‘tapered’ so that the Annual Allowance falls gradually as your level on income rises. There are complex rules governing who is affected, and by how much- and you can find a more detailed explanation here.

If a Budget change to pension tax relief does arrive next week, this may be where it comes.

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