Budget pension raid: don’t crack open the champagne too soon07 March 2016
Budget pension raid: don’t crack open the champagne too soon
Those subject to the higher rates of taxation and most financial advisers were no doubt rejoicing at the weekend, with the news that the Chancellor has apparently scrapped his planned changes to the tax relief on pension contributions. But what does this mean for savers? And more importantly, what else is in store for pensions in next week’s Budget? David Smith, Director of Financial Planning at Tilney Bestinvest, analyses whether this is a “get out of jail free card” or simply a stay of execution for pension savers, and more importantly, what other potential horrors lie in wait in next week’s Budget.
Smith comments: “The news at the weekend was a welcome relief to many who rely on pensions as the bedrock of their savings portfolio. Whilst we were unsure as to what the reforms might have been, the widely anticipated reduction in tax relief or the removal of the tax free lump sum could have been disastrous for those approaching retirement or for those who have waited until later in life to aggressively fund their pensions.
“The more radical ‘Pension ISA’ would not only have created significant administrative issues in the industry, but the recent campaign by the State to push pension savings would have been severely damaged if there was no tax relief ‘on the way in’ to pensions. What’s more, many thousands would be pushed into higher rates of taxes, or indeed lose out on the tax credits they so rely upon, had such a radical change been introduced.
“Whilst this U-turn is great news, do not be fooled into thinking that this is confirmation that pensions will go untouched in Budget on 16th March and let’s not forget that there are already some very significant changes set to come into force in the new tax year already, with the reduction in the lifetime allowance and the introduction of a tapered annual allowance for high earners. The £35bn annual cost of pension tax relief may still remain firmly within Chancellor’s sights despite the weekend’s euphoric headlines. So if the tax relief system is to remain in place what could be done?”
Tilney Bestinvest’s Smith, highlights three areas where the Chancellor could yet tighten the noose for pension investors. These are:
1) A further reduction in the Annual Allowance; that is a reduction in the amount that can be saved into a pension within a tax year and achieve tax relief. This amount has fallen significantly over recent years and currently stands at £40,000 per annum. A reduction to £20,000 per annum or even £10,000 per annum as advocated by the Conservative-leaning Centre for Policy Studies could still be announced. Realistically, this is perhaps the easiest target, as it’s typically wealthier professionals that contribute higher amounts to pensions. However, there are scenarios whereby people wait until their later years, when their income is at its best and their liabilities reduced, to significantly fund pensions and play ‘catch up’. These individual’s retirement plans would be thrown into chaos by an aggressive cap on annual savings amounts.
2) An extension of the Tapered Annual Allowance; a reduction in the Annual Allowance from £40,000 to a minimum of £10,000 for the highest earners in society. From 6th April this year, it is only those with income and pension packages over £150,000 that will be affected; the more they earn, the lower their tax relief on pension contributions. It is quite feasible that the threshold at which the Tapered Annual Allowance kicks in could be reduced even further to incorporate more of society into the Tapered Annual Allowance bracket, representing a large tax saving for the Chancellor.
3) The removal of ‘carry forward’; the facility to potentially utilise unused annual allowances from the previous three years as well as the current allowance. This allows savers to potentially catch up with their pension savings by making significant contributions in a single year – an especially important facility for those who have been unable to save throughout their working life due to other commitments such as raising a family or building a business.
Smith concluded: “Whilst a shake-up to the structure of the pension tax relief system may not be announced this year, the weekend’s briefings emphasised that the “timing wasn’t right”, which may have much to do with the upcoming EU referendum… Reform of tax relief on pensions could well return at a later date… Although the underlying system may not change in this month’s Budget, we would be highly surprised if no other reforms to pension allowances were made.
“What is key though, is that as it stands, pensions are one of the most tax efficient savings vehicles around. It is still possible to contribute up to £180,000 in this tax year, with tax relief of up to 60% available. Our suggestion still remains; pension tax relief – get it while you can – it may not be there forever.”
To discuss the Budget or any other financial planning topic please contact David Smith on 0191 269 9970 / firstname.lastname@example.org
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.
This article is not advice to invest or to use our services. If you are in doubt as to the suitability of an investment please contact one of our advisers.
If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
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About Tilney Bestinvest
Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Bestinvest employs over 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.
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For further information, please visit: www.tilneybestinvest.co.uk
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.