Today’s Budget was relatively quiet for pensions. Many experts were surprised that Philip Hammond did not tinker with pensions to raise cash. In fact, the one measure - raising the lifetime allowance was a small tax giveaway of £16,500 for people with very large pensions.
Like his predecessor George Osborne, he failed to grapple with the thorny issue of pensions tax relief reform.
This will be welcome for many, but means the complex and expensive pensions tax system continues to await significant reform.
Steve Webb, director of policy at Royal London – and former pensions minister under the Tory-Lib Dem coalition – reacted to the Chancellor’s failure to address the pension challenges facing the current government.
“Whilst it’s a relief that we have had a budget with no changes to pension tax relief, we still do not have a long-term vision or plan. So next year and the year after we will still have speculation and uncertainty until the government decides what it wants to do with tax relief and then leaves it alone.”
Darren Philp, director of policy at The People’s Pension, took a similar line and said that the government needed to press on with bold changes to the tax treatment of pension contributions to tackle the inequalities in the current system.
This is in relation to the fact that higher earners get more tax relief than lower earners because tax relief on pension contributions is linked to the level of income tax that you pay.
He says: “Year on year ahead of the Budget there is constant speculation about reform of pensions tax relief, a system that is now on borrowed time, yet we continue to see no action. The current system is unfair for lower earners and
so unclear that most people are not aware of the benefit. A flat rate system, set at between 25-30% and presented as a simple bonus or top-up, would have made a firm statement in support of auto-enrolment and helped more people to save for the future.
However, Tom McPhail head of policy at Hargreaves Lansdown had a more positive view and encouraged pension savers who pay a higher rate of tax to cash in on pension tax relief at its current level, while they still can.
“No news is good news for pension investors;” he said. “The stability of no change is a welcome relief after years of political interference and the salami-slicing of reliefs and allowances. There may have to be further changes at some point in the future; high rate relief is still likely to be scrapped as soon as a government feels it is strong enough to do it; in the meantime, investors can make hay while the sun shines.”
Lifetime allowance to rise, but only by inflation
Although it was not mentioned in the speech, budget documents also confirm that the lifetime allowance – that is the maximum amount you are able to save into a pension before tax penalties will increase from April 2018. The increase is linked to the Consumer Prices Index measure of inflation and will see the allowance rise from £1m to £1,030,000.
Les Cameron, retirement expert at Prudential said: “It’s good to see the lifetime allowance increase is going ahead as planned. This will see a saving of up to £16,500 for those with large funds.”