How could pensions change in the Budget?
Pensions are always a good target when the Treasury wants to boost its coffers. Not only are they complicated, so likely to leave the electorate scratching their heads rather than immediately grasping what’s happened, but they’re also a veritable cash cow.
The cost of pension tax relief in 2015/16 was estimated to have cost £38.2 billion so a reduction in tax relief rates or allowances could certainly help balance the books and, thanks to their complexity, do so without too much headline hoo-haa.
With the first post-election Budget now just weeks away, what could we expect Chancellor Philip Hammond to announce?
A new flat rate of tax relief for all
As it stands, a higher rate taxpayer can get as much as 45% extra from the government every time they make a contribution to their pension. That’s good for the individual but costly for the government. One suggestion is that a new flat rate system is introduced that sees everyone’s contributions topped up by the same amount, regardless of how much tax you pay.
That would be a bonus for basic rate taxpayers, but the losers would be those who had previously relied on a 45% top-up.
A reduction in how much you can save into your pension each year
We could see a reduction in the pension annual allowance - the maximum amount of money you can pay into your pension each year. The limit currently stands at £40,000, but that could change.
Greater numbers of higher earners could also see themselves qualify for the new tapered annual allowance. Currently people earning more than £150,000 a year will have their annual allowance reduced by £1 for every £2 they earn over £150k. That goes down to a minimum of £10,000 for those earning more than £210,000.
That sort of cut seems quite likely. The Chancellor could easily trim a few thousand from the annual allowance under the guise of targeting the rich and recycling the money to subsidise younger savers.
Another fall in how much you can save into your pension overall
The pension lifetime allowance has been a popular target of cuts, having already been reduced numerous times in recent years. Back in 2011/12 you could save £1.8 million into your pension over your lifetime, today that limit is capped at £1 million.
Back in July 2015 the then-Chancellor George Osborne promised to increase the allowance in line with Consumer Prices Index (CPI) inflation from April 2018. So Fidelity’s Richard Parkin suggests another cut would be unlikely.
“What night be fairer and quite profitable for the Chancellor would be to adjust the factor used to value defined benefit pensions for Lifetime Allowance purposes. This is currently 20 times the pension whereas a more realistic rate, given current interest rates, would be closer to 30 times.
“How much this netted in revenue would depend on the transitional provisions. In reality it may not make much in the near term because of these. The biggest losers here would also likely be well paid, long-serving public servants, so he may decide it’s not worth the fight,” he adds.
Other things that could make an appearance could be some of the suggestions put forward by John Cridland in his State Pension review. Strengthening employer commitments to defined benefit schemes have already been trailed in the manifesto and could be an easy vote winner.
So could mid-life MOTs as the increased State Pension Age starts to bite. Cridland recommended individuals be allowed to withdraw part of their state Pension. Whether the government has any appetite for this remains to be seen.
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The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be able to access money held in a pension till the age of 55.This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.