Rumours abound that the chancellor is preparing a raid on tax reliefs. The Sunday Times looks at how this might affect your retirement savings.
Pensions are shaping up to be the main cause of controversy in the budget in two weeks’ time. The chancellor, Philip Hammond, yesterday laid down a gauntlet by hinting that pension tax reliefs for higher earners would be cut.
He told the International Monetary Foundation (IMF) meeting in Bali: “My general feeling on pensions tax relief is that it is eye-wateringly expensive.” Mr Hammond also made clear that in the long term the £40,000 annual limit on how much you can put into a pension tax-free and the £1.03 million tax-free lifetime allowance on your pension pot would need to be cut. These allowances cost the Treasury £39 billion a year.
His comments, alongside a House of Commons paper on pension tax relief and the government’s response to a Treasury committee report on household finances, gave the strongest hint yet as to what the chancellor is considering for October 29.
The government’s response reassured pensioners that the guaranteed increase of 2.5 per cent a year or more to state pensions would remain, but appeared to hint that higher earners could expect to find the tax allowances on their pension savings reduced.
Tom McPhail, the head of retirement policy at Hargreaves Lansdown, a wealth manager, says: “The lifetime Isa is clearly here to stay, as are the pension freedoms; it is also clear that the government is in no hurry to ratchet up the auto-enrolment contributions.
“On pension taxation, the lack of consensus for any structural reform was reiterated, suggesting that the budget was unlikely to contain any radical moves.
“However, the government did highlight the impact of recent changes to tax allowances, in particular the introduction of a tapered annual pension allowance for high earners in 2016. It doesn’t require a great leap of imagination to conclude that there might be a return to this theme.”
Under the tapered allowance, those earning more than £150,000 have their annual tax-free pension saving allowance reduced by £1 for every £2 earned. After that the earner’s pension contributions are taxed at their level of income tax. Mr McPhail suggests that the chancellor could lower the taper threshold to £125,000. Others have suggested a straight cap at £125,000.
Mr McPhail adds: “Mr Hammond needs to raise a lot of money and there is a limit to how much he can make from tweaking the allowances. If he needs £20 billion for the NHS then he will have to go for the £2.1 trillion already in pension funds.
“A tax on pension fund transactions, for example, taking a tiny slice here and there, would bring in a lot of money, but would barely register on most savers’ consciences. I just wonder whether he might.”
Tom Selby, a senior analyst at AJ Bell, an investment manager, says: “There’s no doubt that the Treasury has its eyes firmly set on pension tax relief. However, any fundamental reform — such as scrapping higher-rate relief altogether — would be hugely controversial and risk a backbench rebellion. Given the government’s tiny parliamentary majority, pushing ahead with radical changes could be political suicide. Given the immediate need for cash, particularly for the NHS, I suspect the £40,000 annual allowance is the most likely target.”
Steve Webb, the director of policy at Royal London, an insurer, and Sean McCann, a chartered financial planner at NFU Mutual, believe that the annual allowance could be cut to £30,000 or even £20,000, which would bring it into line with the tax-free allowance for Isas.
In July the Treasury select committee urged the government to give serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, however, yesterday the government’s official response said that “no consensus for incremental or more radical reform of pension tax relief has emerged since the consultation in 2015.”
So what is safe? It is clear from yesterday’s response to the Treasury report that the government is “committed to keep the triple lock in place for the rest of this parliament”.
The triple lock, which ensures that state pensions are increased each year by either 2.5 per cent, the growth in earnings or consumer price inflation, whichever is higher, means income after housing costs in the average pensioner household has increased 8.7 per cent above inflation since the lock was introduced in April 2011.
The Lifetime Isa, in which you can save £4,000 a year for a property or pension, with the government adding a 25 per cent bonus of up to £1,000 a year, is also here to stay, according to the government’s response to the Treasury. The scheme has been controversial.
A group of MPs and industry experts said that people found the rules around the bonus and withdrawals unclear, that it was easily confused with the Help to Buy Isa and could distract from pension saving if used to save for a property. They suggested that all Isas should be simplified into a single “everything Isa”.
