On 16th March 2016, Chancellor George Osbourne announces the 2016 Budget.
Speculation on what will be changed has been on-going for months with recent reports (BBC, 2nd March) suggesting that the government was considering:
- Abolishing the 25% lump sum which pensioners are allowed to withdraw tax free when their pensions mature
- Cutting the maximum annual contribution
- And perhaps even abolishing the entire tax relief system.
Rumoured Changes to Pensions
Tax relief on pension contributions is a growing issue for the economy. Employees benefit from tax relief because the portion of their income that goes into their pension is not taxed. Currently, the more income tax you pay, the more tax relief you receive on your pension contributions. Changes to this system could save the country a lot of money, and benefit some pension savers too.
HMRC data shows that total tax relief on registered pension schemes doubled between 2001-2 and 2013-14. At the moment, pension contributions are not taxed, but money taken out is taxed. Top rate taxpayers get 45% tax relief on their pension, higher rate taxpayers get 40%, and basic rate taxpayers get 20%. Higher rate and additional rate taxpayers receive two thirds of tax relief. Life expectancy continues to rise, meaning that tax relief on pensions is costing the country more as time goes on.
Flat Rate of Tax Relief on Contributions
One option that was considered was bringing in a flat rate of tax relief on contributions. Changing the system so that everyone gets the same level of tax relief would save the government a huge amount of money and benefit most ordinary people. However, this would be unpopular with wealthier people and, according to some, more difficult to administer.
The second option was to change pensions to resemble Individual Savings Accounts (ISAs). With an ISA or the possible new style of pension, contributions would be taxed beforehand via income tax, but withdrawals from the pension pot would not be taxed.
A less drastic option is for Osbourne to reduce the maximum pension contributions that individuals can make in a single tax year. Currently, everyone can save up to £40,000 per year into a pension. According to the BBC, it is “highly likely” that this will reduce, perhaps to as low as £25,000.
This option is less radical than overhauling tax relief, but it could be significant for people who have fallen behind on pension contributions and want to catch up as they approach retirement. The annual allowance has been reduced previously, being cut from £50,000 to £40,000 in 2014. Savers who want to contribute more than these amounts may want to consider getting pension advice soon, as future budgets may see further cuts to this allowance.
Latest News on Pensions in the 2016 Budget
On the 5th March it was reported that the Chancellor had ditched the proposed changes to tax relief on pensions. This means that upfront tax relief will remain, and there will be no flat rate of tax relief after all. However, these changes may still happen in future. An anonymous source at the Treasury told the BBC that this was “not to right time” to make these changes. The proposed changes would have cost the wealthy but encouraged lower earners to save more for retirement.
The announcement was disappointing for some, including the National Pensioners Convention, but ex-pensions minister Steve Webb said it was the right decision. Eleanor Garnier, the BBC’s political correspondent, speculated that the decision not to reform pension tax relief at this time may be related to the upcoming EU referendum, with George Osborne steering away from upsetting voters.
What Can You Do?
Although tax relief is not being addressed in this Budget, Osbourne still has the option of reducing allowances and making other changes to the system. Pension savers of all ages would do well to monitor their own arrangements, get pension advice from qualified pension advisers, and ensure they are contributing enough to see them through in light of changes that may or may happen next week.
If you are looking for advice on pensions, you can contact the advisers at Maxim Wealth Management for a free consultation: 0141 764 0040 (Glasgow office) 0207 112 8654 (London office)