The Chancellor did not announce any plans to review tax relief on pension contributions in Wednesday’s Autumn Statement. However, details of the consultation on other pension changes suggest reform of pensions tax relief very much remains on the cards.
The consultation on the reduction of the money purchase annual allowance states: “The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”
Hargreaves Lansdown said that this was the clearest indication yet that the new chancellor will be reviewing the ways in which people are incentivised to pay money into pensions.
Currently, savers are given tax relief on contributions, equivalent to the rate of income tax that they pay. This effectively means that it only costs £80 for a basic rate taxpayer to save £100, while higher rate taxpayers only need to pay £60 to have £100 in a pension.
The system is expensive. According to the consultation document, in 2014/15 pension tax relief cost government £48 billion and with two-thirds of this going to higher and additional rate taxpayers, many critics also say it favours the wealthy.
“Reform will be sooner rather than later”
Hargreaves Lansdown says the most likely changes are a reduction or total removal of higher and additional rate tax relief, a move to a flat rate top up, or the introduction of age-related top ups which provide greater incentives for younger people to save.
Tom McPhail, head of retirement policy at the company says: “George Osborne left unfinished business following his pension tax relief review. With the impending cost increases to the Treasury as a consequence of auto-enrolment, further reform was always a case of when rather than if; it now looks like it's going to be sooner rather than later.
He adds: “Higher earners in particular are now on borrowed time and would do well to make the most of the tax breaks while they still can.”