It seems only five minutes since the Chancellor’s Autumn Statement, but next month will see George Osborne deliver his annual budget.
Cue media speculation and gossip about the changes he is likely to make to your pension.
If the stories in the press over the past few days are to be believed, the Treasury are considering some pretty fundamental changes to our pensions. We thought we’d round these up and look in more detail at what may or may not happen.
Higher rate tax relief facing the axe?
The Telegraph reported at the weekend that Danny Alexander (right), the Liberal Democrat Chief Secretary to the Treasury, believes higher rate tax relief for pension contributions should be abolished.
Under the present system higher rate tax payers receive tax relief of 40% or 50% when they contribute to a pension. According to the report, Mr Alexander would like pension tax relief to be set at 20% for all contributions; this would apparently save £7 billion per year.
Mr Alexander told the Telegraph: “If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate.”
Tax relief is given on contributions because the income taken from pensions in retirement is subject to income tax, the concern from some, including Mr Alexander, is that tax relief may be given at a higher rate than it is subsequently collected at when income is taken from the pension.
Mr Alexander again: “It may well be that people who then get their pensions are having a pension which is of a size to warrant paying higher-rate tax on the way out, but that’s relatively unusual.”
It seems we will only find out whether higher rate tax relief will be removed from pension contributions when the budget is announced on 21st March; according to the Telegraph, Mr Alexander refuses to disclose whether the matter is even being discussed.
Hold on, perhaps it is being discussed?
If the Financial Times are to be believed the removal of higher rate tax relief is indeed being discussed and at the very highest levels.
According to the newspaper, the future of higher rate tax relief on pension contributions is being discussed by ‘the quad’, namely David Cameron, George Osborne (left), Nick Clegg and Danny Alexander.
An unnamed source was quoted as saying: “This is being looked at, it is definitely a good way to be able to raise money to get towards the £10,000 tax rate.”
The FT report that Mr Osborne is apparently “interested in the idea” although nervous of the effect it could have on traditional Conservative voters who are likely to be most affected by any changes.
Responding in the FT article, Gavin Kelly, of the Resolution Foundation think-tank, said: “If the Treasury is looking for serious cash to give some much needed help to those on low-to-middle incomes it is no surprise that they are considering a further reduction in the level of the annual limit, which could generate a lot of money.”
Mr Kelly continued: “It will obviously be highly controversial with many in the Conservative party as it will hit high earners, and it will also face opposition from some in Whitehall – so they will have to hold their nerve in the weeks ahead.”
The common thread through all these stories is that the government want to raise additional money which will be used to increase the personal tax allowance to £10,000; a key pledge in the Coalition Agreement.
Another way of raising additional funds, which is perhaps more subtle that a reduction in the percentage rate of tax relief, is to reduce the amount which can be paid into a pension and qualify for tax relief.
In the last Budget the Chancellor reduced the annual allowance from £255,000 to £50,000, cutting massively the size of pension contribution which could qualify for tax relief.
If a second story in the Financial Times is to be believed, the Chancellor is considering a further reduction.
According to the report, during the consultation period leading up to last April’s change, an annual allowance of between £30,000 and £45,000 was considered.
Tax free lump sum
Before every Autumn Statement and Budget there are usually stories appearing in the financial press speculating that the tax free lump sum, which is available from most pensions at retirement, will be removed, abolished, or restricted in some way.
At the time of writing we cannot find any such articles this year, but whether based on real inside knowledge or just a recycling of old ideas we have no doubt they will appear.
Our view: rebuild trust
These stories have one thing in common, altering pensions so they either cost the government less or they raise additional revenue for the Treasury; many of the changes to pensions over the last 15 years have had the same aims.
Partially as a result of the changes seen over the past few years, it is fair to say that pensions are mistrusted by many, for some the word ‘pension’ is as toxic as ‘banker’s bonus’.
Over the past few years we have seen significant changes to the pension system. First we had the removal of the tax credit by Gordon Brown, then ‘A Day’ and ‘Pension Simplification’ came and went, the state pension has been delayed for many, final salary schemes are closing each week, many are now rising in line with CPI (Consumer Prices Index) and not RPI (Retail Prices Index) and lower gilt yields are pushing down Annuity rates and affecting those people in Income Drawdown.
Each change tends to lead to increased complexity, a further erosion of trust and often lower benefits in retirement.
Enough is enough!
Yes, we would welcome steps taken to help people affected by falling Annuity rates, to pick one specific issue, but the problems are more fundamental than that.
In our opinion, people are not planning for retirement for two main reasons, firstly having the spare money to contribute to their retirement and secondly, lack of trust that their pension will actually deliver.
We believe it is the issue of trust where the Government and the pensions industry itself, should focus.
The government needs to take steps to increase the confidence of the general public in their pensions and stop making retrospective changes which often reduce the value of pensions and were not even conceived when many pensions were started.
For our part, the pensions industry needs to educate the general public on the need to make provision for their old age, whilst increasing trust in financial advisers and access to good qualify advice and information.