With pension tax relief a possible target in the Budget, Ian Price of St. James's Place asks if higher earners should act now.
With less than a month to go until 8 July and the second Budget of the year, we don’t have long to wait to find out what Chancellor George Osborne has in store.
As always, rumours are circulating about what he will do, including the potential for further changes to pensions. He has already made clear that this Budget will provide the opportunity to deliver on measures contained in the Conservatives’ election manifesto, adding that he didn’t want to wait to turn promises made in the election into reality.
And with a majority government, albeit a small one, the Conservatives have a freer hand to press ahead with their plans to balance the books and keep Britain on a sustainable path to recovery.
So what do we already know will be in store – and what more might there be – for those saving for, or in, retirement?
In his last Budget, the Chancellor announced that the lifetime allowance – the total value of pension assets you can hold without triggering an extra tax charge – would be reduced from £1.25 million to £1 million from April 2016; and that it will increase each year in line with the Consumer Price Index from April 2018.
So we know how big your pension fund can be at retirement. We also know that the maximum contribution you can make each year is £40,000, or 100% of your salary, whichever is lower. And we know that if you make a contribution today you can receive tax relief at your highest marginal rate.
Tax relief has always been an important and attractive factor as far as funding your pension is concerned. At the moment, the government automatically tops up your pension contributions with tax relief at 20%, but that relief rises to 40% if you are a higher rate taxpayer and 45% if you pay Income Tax at the additional rate.
Tax relief on pension contributions costs the Treasury £34 billion a year. Yet a 2013 study by the Pensions Policy Institute showed that around 20% of that tax relief was paid to additional rate taxpayers, who make up only 1% of UK taxpayers. It therefore seems an obvious target and remains firmly in the sights of the Conservative government as it seeks to fund its free childcare and Inheritance Tax plans.
In the run-up to the general election, the Conservatives made a manifesto pledge that those earning above £150,000 would see the maximum level of annual contribution on which they can receive tax relief pared back from £40,000 to £10,000, on a sliding scale as their salary increases to £210,000.
The other main political parties also set out their proposals, which included plans to reduce all higher rates of tax relief and instead introduce a lower, flat rate of 33%.
So what will happen and how soon? Of course, it is not unknown for manifesto pledges never to see the light of day. The weeks since the election have given the Chancellor some time to reflect on proposals that many commentators view as an attack on the pension regime, so soon after the ‘pension freedoms’ introduced in April. Also, Osborne has something of a reputation for surprising savers and investors – so we might see alternative plans introduced. It is quite possible that any changes will be introduced with immediate effect. In short, we don’t know.
As with all financial planning, we can only work on the basis of what we do know. We know what tax relief you get today if you make a contribution. So if you are a higher rate taxpayer, it might be worth bringing forward planned contributions to before the Budget to secure tax relief at current rates. As ever, it is important to take advice before making any pension contributions to make sure it is the right course of action for you.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.