Balancing the Treasury’s books
Any changes to pensions are likely to be made in an attempt to boost the Treasury’s finances. The cost of pension tax relief was an estimated £38.2 billion in 2015/16*, so a reduction in tax relief rates or allowances could help to balance the books. Pensions are also seen as an easy target for the Chancellor because their rules are already so complex.
Flat-rate pension tax relief
One option is to switch to a flat rate of tax relief. Currently, the Government adds up to 45% to pension contributions depending on how much Income Tax you pay. A new system could see everyone’s contributions topped up by the same amount regardless of how much tax you pay. This would likely be a bonus for basic-rate taxpayers, but could see higher and additional-rate taxpayers worse off.
Annual allowance reduction
We may see a reduction to the pension annual allowance – this is the maximum amount of money you can pay into your pension each year. The allowance is currently £40,000, but this could change on 22 November.
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 this amount, down to a minimum of £10,000 for those earning in excess of £210,000. There have been rumours that this £150,000 limit could be reduced in the Autumn Budget.
The pension lifetime allowance
The pension lifetime allowance has been cut numerous times in recent years, gradually falling from £1.8 million in 2011/12 down to £1 million this year. In July 2015 George Osborne promised to increase the allowance in line with Consumer Prices Index (CPI) inflation from April 2018, but there is still time for a U-turn – and even a decrease in the allowance to boost Treasury revenue.
What can you do?
Whether or not these changes come to fruition, pensions and retirement planning remain two of the most complex – but important – financial challenges faced by most people. We believe that the best way to stay on top of things and enjoy the retirement you want and deserve is with expert financial advice.
This article was previously published on Tilney prior to the launch of Evelyn Partners.