Pension savers should act now to beat changes to tax relief

Pensions escaped the 2019/2020 budget unscathed, but the threat of further restrictions looms large with the Chancellor of the Exchequer describing pensions tax relief as ‘eye wateringly expensive’.

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The UK budget for 2019/2020 generated the fewest headlines for some time. The economy has been performing slightly better than forecast, ensuring that tax receipts have been higher than expected, which allowed UK Chancellor of the Exchequer Philip Hammond to announce more giveaways, and took the pressure off tax rises.

Increased spending on the National Health Service (NHS) came hand-in-hand with rises in the personal allowance to £12,500 (and the 40% tax threshold to £50,000) a full year earlier than anticipated.

Pensions were untouched; the only change being the rise in the lifetime threshold to £1,055,000 to keep track with changes in the consumer price index (CPI).

With Mr Hammond and the Conservatives unwilling to ‘rock the boat’ at a politically sensitive time, potentially preparing themselves for the possibility of a snap election, it seems probable that a raid on pensions will come in a year’s time.

It is still unclear what measures the Conservatives, or a future Labour government, may take to lower the upfront cost of tax relief, but one of the following seems possible:

  1. Introduce flat pensions relief of 30%. This would be popular with lots of voters, as it would give an additional lift to middle and lower earners, while getting tax revenue from 40% tax payers
  2. Lower the annual savings limit to £30,000 from £40,000. Only the top tier of pension savers would be hit, but small business owners who typically make pension payments later in their lives would not like it
  3. Reduce the lifetime allowance. As recently as April 2014 savers could have £1.5 million in their pension, which was then cut to £1.25 million and then £1 million. It is possible that the limit could fall again, on top of which an onerous 55% tax charge is in place
  4. Restrict higher earners. There is a taper in place which sees taxable incomes over £150,000 have their savings limits shaved by £1 for every £2 earned, so that those with incomes over £210,000 can only save £10,000 into a pension. The threshold might be reduced, and the ratio could be made more unfavourable
  5. Cancel the 25% tax free withdrawal. Likely to be very unpopular, as many people use the cash to pay off the last chunk of their mortgage. It would be a brave Chancellor that inflicted this on pensioners
  6. Cancel the carry forward allowance. At present you can use your last three year’s unused £40,000 allowance to make a total pension payment of £160,000 if that amount is less than your current-year taxable earnings. Only the wealthiest savers can make use of it, making it a bit of an anomaly

Whatever the outcome is, making additional payments into your pension this year may be a prudent thing for many pension savers to do.

We’ve written before about the long-term benefits of tax relief in SIPPs, the relative attractions of a SIPP vs a buy-to-let and how saving money into a pension can legally avoid student loan repayments and child benefit reductions. The pension wrapper is still a very attractive one, and the earlier you start saving the greater the benefits should be over time.

IG offers a share dealing SIPP through James Hay, which can also invest in our managed Smart Portfolios. A 20% tax relief is automatically claimed back from HM Revenue and Customs (HMRC) and higher tax payers are able to claim more on their annual tax return.

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