There’s no doubt about it. Us Brits need to save more, much more in fact if we want to live in relative comfort in our twilight years.
It was with interest, then, that I read the announcement from the Chancellor that the government will not announce any changes to the pension tax relief regime until next year’s Budget.
Many pension experts believed that George Osborne would make an announcement on the costly provisions of pension tax relief in the Autumn Statement, which is due later on this month.
It has long been speculated that the pension tax relief system is under threat — indeed, changes have been rumoured for as long as I have been investing, so are these just more rumours or can we expect something of substance at the Budget in March 2016?
A stay of execution?
Under the current system, the annual allowance (generally £40,000) is the maximum amount that can be contributed by anyone (yourself or your employer, for instance) into all your pensions in a tax year. Those who have contributions registered between 6 April 2015 and 8 July 2015 may have a higher allowance for the 2015/2016 tax year. Contributions above the annual allowance are taxed as income, unless you are able to carry forward unused annual allowance from the last three tax years. The annual allowance does not apply to any pension transfers.
In addition, savers currently benefit in line with their tax band, so a £1,000 contribution could come at a net cost of just £550 to someone subjected to the 45% tax rate. Here, the government automatically adds 20% to the SIPP, while the remainder is claimed through the self-assessment system – this part of the rebate can be spent on anything, as there is no requirement to add this to your SIPP, though it is possible to place this rebate in a SIPP and claim further tax relief – and some savers do so.
All in all, it is a rather generous system that costs the Treasury billions each year. And it seems that the Treasury has this in its sights since the pensions green paper was announced in the Summer Budget.
One of the criticisms of the current system is that most of the cost is given to the top 10% of wealthy individuals. Accordingly, it has been rumoured that the Treasury was looking seriously at a single rate that would enable the government to match contributions directly in the SIPP.
Interestingly, a flat rate of 33% has been muted, which would enable the Treasury to give £1 of relief for every £2 saved – this would also go direct into your pension pot, cutting out the requirement to claim the additional relief in the annual tax return.
With the potential for change, now could well be a good time for wealthy savers to cash in before it’s too late.
Ever-decreasing limits
In the March 2015 Budget, George Osborne cut the maximum anyone can save into a pension over their working life and still obtain tax relief from £1.25m to £1m. This change will take effect in April 2016.
It means that from April 2016, anyone who pays more than £1million into their retirement pot will be taxed at up to 55% on the excess.
Those with a longer memory will be aware that this had already been reduced from a high of £1.8m when the coalition came to power.
This change alone could mean a near-£2bn tax raid on pensions that has the potential to hit thousands of middle-class savers, some of whom may be unaware, particularly if they are lucky enough to still have a public sector pension.
Clearly nothing is off the table currently — when announcing plans for the consultation in his Summer Budget, Mr Osborne said that pensions could be taxed like ISAs. This would mean pension contributions were taxed but growth and withdrawals were tax-free.
What does this Fool think?
In my opinion, I am pleased to see what appears to be an open consultation by the Treasury. There is, in my view, a need to overhaul what many savers see as an overly bureaucratic system, which favours high earners and doesn’t allow access to their pot at times when the money is needed most – for example, buying a house.
I would certainly welcome a flat rate that encourages all of us to contribute towards our retirement. In my view, as a country we need to teach financial planning early on through our education system. It is only then that the next generation of savers will become more engaged and better prepared to plan for their financial future.