The pensions tax relief dilemma – what will the Chancellor do? Comment from Andy James, Towry01 November 2016
Following the somewhat surprising and very pragmatic U-turn by the Treasury on the selling of annuities we turn our attention to the fast approaching Autumn Statement. With a new Chancellor and Pensions Minister at the helm, rumours of what will be in the statement are more rife than usual. Andy James, head of retirement planning at Towry, looks at the existing rumours and what they would mean to the industry as well as what he would like to see in November:
“We have heard various rumours on the pension front so far – notably the introduction of a flat rate pension tax relief, a tapered pension tax relief and a reduction in the annual allowance to £20,000. But would these be good or bad for savers? Let’s look at the pros and cons.
A flat rate pension tax relief
- Pro: easier to understand and see the benefit as well as arguably being fairer
- Con: May further disengage higher earners from pension saving as it is not as attractive as the current system. A tapered pension tax relief based on age with younger savers getting greater levels of relief
- Pro: Could encourage younger savers to start pensions earlier when compounding will give better longer term returns
- Con: It is more complicated to administer and doesn’t actually guarantee young people will start saving earlier as many people do not have the necessary funds available until later in life
A reduction in the annual allowance to £20,000
- Pro: Much simpler to understand than tapered allowances for high earners
- Con: Will significantly reduce the ability to save into pensions and mean that catching up in later life will be a real challenge
“There is always the possibility of attacks on other allowances such as Capital Gains Tax which could also impact those in or heading towards retirement.
“The removal of the intention to balance the budget by the end of this parliament will have reduced the need to clawback tax allowances but we are aware that the trend to a balanced figure is still required. The amount eaten up by pension tax relief is always going to stand out for any new Chancellor and we cannot therefore assume that the current tax relief arrangements will be left alone.
“We of course won’t know what will be in the statement (leaks aside) until it is delivered and in many ways speculation does little but unnerve investors. Any changes to tax relief of the nature speculated would take time to implement and therefore could not be brought in immediately. The reduction in annual allowance could of course be quickly implemented. If this did come to pass the hope would be that the current highly complex tapering of the annual allowance for those with incomes in excess of £150,000 would disappear.
“Whatever happens, my main hope is that our new Chancellor looks to consult on any changes and resists the temptation to pull a rabbit out of the hat which leaves the industry chasing around trying to comply in a short time span. We have seen how this can cause issues with the scrapping of the secondary annuity market once it became clear that too few buyers would enter the market to ensure proper competition and thus fair pricing.
“Maybe therefore we can just have the Chancellor’s ideas on what he would like to do and then we can all get around the table with the right people in the room to discuss how best to achieve that!”
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