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.”

Annual allowance

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.

2 Responses to “Another budget, another chance to tinker with your pension?”

  1. Jessica Duxbury FRSA says:

    If those who have responsibly planned their lives, deciding, for example, rather than paying off their mortgages, to pay school fees for their children, (who will be working to produce the taxes to fund everyone in retirement, including those who do not have children)in the expectation of a tax free lump sum on retirement,on the basis of which their pension was sold to them and which they have paid for over forty years, now find that the govt. has taken it away, what legal redress do they have? This posthoc change to the original contract is illegal.

    Lowering the tax relief rate on pensions would not be illegal, since tax rates over the past forty years have gone up and down although it would clearly be unfair to tax people twice for their pensions. It would also be very stupid to do so, since it would discourage people from investing in pensions, which provide a significant part of the investment in private business and government bonds that are so crucial to economic growth.

  2. Syd Bishop says:

    Nothing is illegal if the government passes a law to say that it is legal. What you mean, Jessica, is that it is immoral and/or unethical, with which I agree.

    Pensions are not taxed twice. They are funded with earnings that have not been taxed, but you pay tax when you take the earnings out of the pension instead. The myth of tax free growth and dividends is just marketing hype from the FSAs who want you to open a pension fund so that they can take a management commission on your savings, since there is absolutely no difference to the end result if you are taxed as the money goes in, or taxed when the money comes out assuming that the tax regime is the same at each stage. Since nobody knows whether that will be true or not, nobody can ethically sell you the advantages of a pension fund with the proviso that if you pay tax at a higher rate while you are contributing than you will pay when taking it back out, then the tax relief is bigger than the subsequent tax bill during retirment – i.e. you defer the tax deduction to a time when you are in a lower tax bracket.

    An ISA invested in a spread of good quality (i.e. mostly found among those that are not heavily advertised) equity income funds to the tune of £10600 (this year) annually increasing with inflation will provide a generous pension if maintained over 40 years. If you think you need more than that will provide, then you are probably just greedy. Of course, it takes a bit of personal effort to organise it – you could pay a commission to an FSA instead to do it for you if you want.

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