UPDATE (07/03/2016): The Government has stated since this article was written that proposed changes to pensions tax relief will now NOT be announced at the Budget in March 2016. However, a spokesperson for HM Treasury left the door open for changes at a later date, possibly at the Autumn Statement later this year or Budget 2017, stating “now is not the right time”.
The second Budget of the current Government will be published on Wednesday 16th March 2016.
The Budget of 2014 gave us Pension Freedoms, which have given pension savers more flexible choices on how they can use their pension pots when they retire. With the dust barely settled on Pension Freedoms, the Chancellor has said that more sweeping pension changes could be on the cards, after he launched a fresh consultation in 2015.
So what are the changes likely to be? We won’t know for definite until the date of the Budget, but these have been the key talking points over the past several months…
- The pensions Annual Allowance could reduce further – possibly to as low as £10,000 a year.
The pensions Annual Allowance is the limit to which pension contributions with tax relief can be made in a single year. Capping it would mainly affect high earners – and those who wish to make large one-off pension contributions.
- The pensions Lifetime Allowance could also reduce again, be reformed, or possibly even scrapped.
This is the limit to which contributions can be made in a lifetime, with tax relief. Again it is high earners most likely to be hit by a reduction in this allowance but increasingly more people have been caught by it as it has gradually reduced, particularly those with public sector defined benefit pensions. Scrapping the complex Lifetime Allowance rules would be welcomed by many – particularly if the Annual Allowance is to reduce again as this will have more bearing on the amount of tax relief can claim in a lifetime in future.
- Higher-rate and additional-rate pensions tax relief seems likely to be cut in favour of a flat rate tax relief for all.
Of all the changes potentially on the table at the Budget this one seems most likely. It could potentially save the Treasury billions in tax relief, which currently disproportionately goes to high earners. It would also give a boost to lower earners’ pension savings who are arguably the ones more likely to rely on State benefits if they have made insufficient provision for retirement.
- Salary Sacrifice could be reformed or scrapped for employees’ pension contributions.
This has reportedly been in the target sights of the Treasury for some time. Salary Sacrifice means that individuals can agree with their employer to “give up” part of their salary, in exchange for pension contributions, with an immediate income tax and National Insurance saving for the individual, plus National Insurance savings for the employer. Scrapping or reforming this would bring more tax into the Treasury but could act as a disincentive to employees to save more into pensions.
- Pensions could become more like ISAs, with contributions paid from taxed income, whilst income would be tax-free on the way out.
Pensions are currently taxed on an Exempt, Exempt, Taxed (EET) basis which means they benefit from tax relief up-front and the growth on that, and are taxed on the way out (with the exception of the tax-free lump sum). The Government could seek to change this to a Taxed, Exempt, Exempt (TEE) basis, so there would be no tax relief on the way in, but any income taken would be tax-free in retirement, and pensions would be more like ISAs. Indeed, they could be rebranded as ‘Workplace ISAs’, ‘Retirement ISAs’ or the like, as ISAs have been incredibly popular whereas pensions have suffered from a poor image for some time. This would also be a stealthy way to remove the Tax Free Cash element of pensions as, although the income would all be tax-free, currently the Tax Free Cash is effectively Exempt, Exempt, Exempt (EEE) as it benefits from tax relief up-front and is tax free on the way out. This move would also save the Treasury billions.
With a looming referendum on the EU, the Chancellor could view the political risks from wide-reaching pensions reforms as politically risky and hold off for now, or he could go for the Big Bang approach and push ahead. We simply won’t know until the day of the Budget. What we do know is that further pensions change is coming and, particularly if you’re a high earner, it’s likely to lead to a further reduction in the available tax reliefs in some shape or form, so it’s crucial that if you’re considering making pension contributions, you do so sooner rather than later.
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