Watch out for further pension bashing
I'm no politician, nor desire to be one, but the repeated assaults from governments, past and present, on our private pensions come from a belief that savers continue to get far too good a deal.
That is, the incentives to save – in particular, the valuable upfront tax relief on our pension contributions – are too costly.
The Treasury hinted at this last year when it launched a probe into pensions tax relief. The supporting consultation document pointed out that the gross annual cost of providing tax relief on pension contributions stands at north of £50 billion.
The figure reduces to £20 billion if the tax on pensions in payment (government revenue) is netted off against the cost of this tax relief. But those are considerable costs whichever way you analyse these numbers – “significant” was the word the Treasury used.
As things stand, non-taxpayers receive basic-rate tax relief on their pension contributions. For those without earned income, the maximum annual pension contribution is £2,880 to which the taxman adds £720 to make a total gross contribution of £3,600.
Basic-rate taxpayers receive 20% tax relief on contributions. For instance, you make a payment of £8,000, to which the taxman adds £2,000 to make a contribution of £10,000. And the higher your rate of tax, the more you could receive.
A higher-rate (40%) taxpayer’s £10,000 contribution to a pension costs just £6,000, and an additional-rate (45%) taxpayer’s only costs £5,500.
It had been proposed that these should be replaced by a flat-rate tax relief of around 30% for all.
Although the tax relief probe was pushed into the long grass earlier this year by the then Chancellor George Osborne, it wasn’t because the government thinks the “significant” £50 billion annual gross spend is a fair price to pay to encourage us to fund our own retirements (and not be a burden on the state). It was sidelined because Mr Osborne thought any draconian changes to pensions tax relief might agitate Middle England in the run-up to the vote on Brexit.
At some stage, the government will return to this thorny issue, but it probably will not for a while. We now have a new Chancellor of the Exchequer installed at the Treasury in Philip Hammond who will want to do pension things his own way. In the short term, I expect more pension cost cutting that will come in two forms.
First, there could be a further tightening in the amount that can be saved in a pension. Currently, the so-called lifetime allowance is £1 million, which means that any fund value above this is subject to a tax charge of at least 25% if taken as income, and 55% if taken as a lump sum.
Although the previous government vowed to increase the £1 million lifetime allowance by the Consumer Price Index (CPI) rate of inflation every year from 2018, I wouldn’t be surprised if this commitment was now abandoned. It could also be accompanied by a reduction in the allowance to, say, £750,000. This would be a controversial move given the allowance stood at £1.8 million six years ago, but with a new Chancellor, anything is possible.
Second, there could also be yet more restrictions placed on the amount you can invest annually in a pension. Back in 2010/11, this annual cap was £255,000 but was slashed to £50,000 in 2011/12 and to £40,000 in 2014/15.
In this tax year, for most people, it still stands at £40,000, but additional-rate taxpayers earning £150,000 or more receive a lower cap, in some cases £10,000. The Chancellor could easily opt to taper the annual allowance at a lower income level – say, £100,000 rather than £150,000.
Mr Hammond might also delay the launch of the Lifetime Isa, a quasi-pension designed to help the under-40s save for retirement and build a home deposit. This is scheduled for take-off in April, but could yet join tax relief reform in that crowded long grass. Several providers have warned that the government’s failure to provide key details means they will not have enough time to hit the deadline.
Such changes could be announced in Mr Hammond’s debut Autumn Statement this November. So my message to you is: make pension hay in the late summer sunshine before the Chancellor gives pensions another political kicking.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).