Pension Tax Relief – George changes his mind…..

After 6 months of leaks and warnings, The Chancellor has woken up to the idea that discouraging pensions saving by removing the tax incentives was a bad idea.

If it was such a bad idea, why take all this time come to the conclusion……? Nothing of course to do with upsetting half his MPs with the EU exit debate in process?

Previously this blog was highlighting the expected change and the need to take action before The Budget on 16 March.

All we know now is the change to some sort of ISA style pensions saving plan, will come at some point, but not just yet….

Another perspective

Clearly there is a balancing act here for the government and tax payers. With an ageing population we are all going to live longer and be drawing on our pension pots for longer.

If you want to retire on an income of £40k per annum, you probably need a pension pot of £1 million when you retire, so you can draw 25% tax free then draw down an income to live on in your retirement. £1 million is a huge amount for most people, yet an annual income of £40k you retire may be seen as modest…..

Pensions tax relief is the carrot to persuade people to save for their retirement and not be a burden on the state. The Government can’t afford for us not to save for our retirement, yet seem reluctant to allow higher rate tax relief on pension contributions to continue.

To take action now, or if you have any questions please contact your usual Dafferns partner or manager

What might have been………. Was this the last opportunity for 40% and 45% pension tax relief?

In the summer 2015 post election Budget, the Chanceller announced a consultation would take place into pensions tax relief.

Soon afterwards Government ministers began releasing messages to the press, warning that high earners should act now to avoid losing out when this pensions tax break, worth thousands of pounds each year comes to an end. The cost to the Exchequer of tax relief on pension contributions is circa £35 billion per annum.

On 16 March [or sooner :-)] George Osborne will announce the outcome of the review of pension tax relief and although there have been no confirmation of changes, reputable sources are suggesting the tax relief will be replaced with a single ‘savings incentive’ of between 25% and 33% for everyone.

If that happens higher-rate taxpayers could lose a benefit worth up to £8,000 year (that is a £40,000 contribution for a 45% tax payer, and 25% savings incentive introduced). For basic-rate and non-taxpayers it may make sense to delay your contributions until after the announcement, at least from a tax perspective. If the rumoured changes happen a £1,000 gross pension contribution could only cost £670 (if 33% rate), £750 (if 25%) compared to current rules of £800.

If there is no change to the rules announced in the March 2016 Budget, you would still have opportunity to use your allowance before 5 April.