Tories plan pension raid to fund IHT overhaul

13 April 2015

The Conservatives have announced plans to restrict pensions tax relief for higher earners to fund an increase to the inheritance tax (IHT) allowance.

Under the proposals, the Tories will increase the inheritance tax allowance from £325,000 to £500,000 per person in 2017, effectively giving married couples a total allowance of £1 million.

Prime Minister David Cameron said the overhaul would be funded by limiting tax relief on pension contributions in excess of £10,000 a year for workers earning more than £150,000.

Hargreaves Lansdown said the move would hit those savers who have enjoyed financial success at an early age because those who are earning this level in the latter end of their working lives will already have had the opportunity to amass a decent pension in previous decades.

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Tom McPhail head of pensions research at Hargreaves Lansdown said the proposals would not only hinder pensions saving but also exacerbate the existing imbalances in the UK housing market.

"This policy announcement will undoubtedly be popular with the minority of home-owners who stand to benefit from it. Aside from this however, it is likely to distort both the housing market and the long-term savings market. It comes on the back of a series of fundamental changes to the pension system in recent years (auto-enrolment, pensions freedoms and state pension reform) without any behavioural analysis or assessment of the likely long-term consequences."

Adrian Walker, retirement planning manager at Old Mutual Wealth, agreed and said that ministers needed to allow the new rules to settle before making any further changes.

"Pensions tax relief is being used like an election piggy bank and there is a danger that the emerging goodwill towards pensions is stunted. People are paying attention to pensions like never before and a period of certainty and stability would go a long way to rebuilding the savings habit in the UK," he said.

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