There is a lot of talk in the money pages at the moment about the changes that the Chancellor might make to pensions legislation in his budget next month.
Pensions are very tax efficient in that money paid in to a pension is generally eligible for tax relief at your highest rate, growth inside the pension is generally tax-free, and you can usually take up to 25% of your pension fund out without paying tax in it.
Many commentators reckon that these benefits are too generous, and cost the treasury too much money.
So, what could the Chancellor do to reduce that cost?
He could limit the amount of money that we are allowed to save in our pension tax efficiently by reducing either the annual allowance, currently £40,000 for most people.
This Government has already come under fire for changes that were made to the annual allowance a few years ago that hit higher earners in final salary schemes so he may decide not to rock the boat any further on that one and to leave that particular allowance alone for the moment.
He could play with the lifetime allowance. Changes to that are likely to have an impact on many higher earners in final salary schemes, many of whom are traditional Tory voters and might be persuaded to change that vote if changes to pension rules left them with higher tax bills.
Rather than decrease these allowances he might decide to increase both the annual allowance and the lifetime allowance since that would be one way of dealing with the disquiet being felt by doctors and other members of defined benefit schemes who have no control over their pension payments on a year by year basis.
That kind of move would upset millions who are already struggling to make payments into pensions because of increasing cost of living issues, and who have little sympathy for doctors, dentists, and other high earners who already have access to very good, inflation proofed pensions.
That leaves changes to the amount of tax relief that we are able to claim on contributions to pensions. At the moment we can claim tax relief at our highest rate of tax, which means that a higher rate tax payer is effectively able to put £1000 into a pension at a net cost of just over half that amount while a basic rate tax payer will have to pay nearly £8000 to have £1000 in their pension.
It’s possible that he will restrict relief for everyone to the same rate, perhaps 30% or so.
It’s also possible that, like in many years previously, he will do absolutely nothing and leave all of the allowances mentioned above exactly as they are. We’ll know in a month or so.
Is the sun setting on tax-efficient pensions?
