Not for the first time there are many rumours as to what could happen to pensions in the Chancellor’s autumn statement on 5th December, with a further £10 billion of cuts required to balance the country’s books.
Unlike previous years, we as a country are in a significantly worse place than compared to any time in recent history and it is my opinion that certain tax advantages currently enjoyed by pension savers will be targeted in the autumn statement. As always the question we cannot answer is which ones, but some of the more obvious areas the chancellor could attack are:
· the annual allowance for tax relief on pension savings from the current limit of £50,000
· the maximum tax relief rate available on contributions, which is currently the highest rate an individual pays income tax e.g. a 50% income tax payer can potentially receive 50% tax relief on their pension contributions
· the option for savers to ‘carry forward’ to fully fund their £50,000 allowance for the previous 3 tax years
· the 25% tax-free cash sum (or Pension Commencement Lump Sum as its now known) option
· stop or limit salary sacrifice/exchange to enable the HMRC to gain Employer’s and Employee’s National Insurance on an employee’s pension contributions to a Personal or Group Personal Pension policy
Over more recent years there has been increasing speculation that the more radical option of restricting tax relief on contributions to the basic rate of income tax may be employed.
We would be surprised, if not shocked, if the Government went this far, but restricting tax relief to a maximum rate of 40% is a very real possibility. The rationale for our not expecting tax relief to be restricted to the basic rate (20%) now is because we don’t think the Government want to generate a very public ‘cloud’ over pensions (which restricting tax relief and/or removing the tax-free lump sum option would cause) at a time when it is actively encouraging employees to join their employer’s pensions under the newly effective Workplace Pension Reform legislation.
In this current climate nothing can be ruled out and with ever more influential ‘pension’ people suggesting that limiting tax relief on contributions to 20% would be ‘fair’ PLUS the figures provided suggesting this change would instantly save circa £7 billion of the required £10 billion per annum cuts, a restriction on contribution tax relief to 20% basic rate could happen.
Our guess (which is all anyone can offer bar the Chancellor and his inner circle) is that its more likely they would limit tax relief on contributions to 40%, reduce the annual allowance to, for example £30,000, and potentially also remove the ‘carry forward’ option.
Our general advice (this is not personal advice nor should this be taken as such and acted upon as a result) is that if you are a higher rate tax payer who:
a) intends to make a lump sum pension contribution this tax year
b) has the cash available to do so now and
c) can afford to do so
you consider making this contribution prior to the 5th December just in case tax relief is restricted or the annual allowance is reduced (if this would affect you) as, although it cannot be guaranteed, such changes are unlikely to be retrospective.
If you have any questions or require any further information please do not hesitate to contact Wingate’s Corporate Pensions Team on 0844 406 0027.