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Statement of intent?

01 December 2015

The Chancellor has resisted giving the green light to pension reform…for now.

Chancellor George Osborne’s Autumn Statement covered changes to the state pension and automatic enrolment, but steered well clear of pensions tax relief. The government’s response to its consultation has now been pushed back to next spring.

The consultation asked whether there is a case for reforming pension tax relief, which currently sees Income Tax on people's contributions returned to their pension pot, whether it is paid at the 20%, 40% or 45% rate.

Targeted: relief

Experts have warned that higher and additional-rate tax relief will be targeted if the government decides to bring in a flat rate for everybody, or if it moves the UK to an ISA-style system where pension contributions are taxed, but withdrawals are exempt.

For the moment, though, rates of tax relief remain unchanged. “This is welcome news for all higher-rate tax payers in the short term,” says Ian Price, divisional director at St. James’s Place.

Any change to the current system would be highly complex and need careful planning, so the fact that the government has left pension tax reforms alone - promising a response to the consultation in next year’s Budget - perhaps suggests that an overhaul is more likely.

Price says that investors will read between the lines. “You have to ask why the government needs more time to respond to the consultation if the changes are only going to be minimal,” he says.

Off the hook

There had been speculation that the government would put an interim arrangement in place to stop high earners scooping up tax relief before any new regime is introduced. In the end, no such measure was announced by the Chancellor.

“High earners may wish to consider taking this opportunity to maximise pension saving, because I’m more certain than ever that the current levels of tax relief may not be around for much longer,” says Price.

If you're a high earner, you could add up to £180,000 to your pension this tax year and receive up to £81,000 in tax relief by using the carry forward rule. Good news if you have the ability to make such huge additions, but smaller sums will benefit too.

If you have significant wealth in a pension already, it’s worth noting that the lifetime allowance reduces to £1 million in April. Whether the new system will mean scrapping the lifetime allowance altogether remains to be seen.

In the meantime, pension savers will have to wait until next year’s Budget to learn whether they will gain or lose from what could be the UK’s biggest ever pensions shake-up.

 

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.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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