Well, the rumour mill has started in earnest about what further changes to the pension rules George Osborne may or may not be contemplating in the March budget. The Daily Mail’s website – This Is Money – has launched a campaign to ‘’stop savers’ pensions being destroyed.’’ There may be some mileage in it and the broadsheets also ran with similar stories last weekend.
So what can the Chancellor do and how easy is it to implement?
Tax Relief on Pension Contributions
Tax relief is currently available at the marginal rate of tax meaning high earners (those with earnings above £150,000 p.a.) can get at least some tax relief at the rate of 45% on contributions paid into a pension plan. £100 invested at a personal cost of just £55.00 with the Government picking up the rest of the tab at first glance does look generous The Chancellor has already cut the amount high earners may contribute from April 2016 using a tapering system so any further attack may cause a ‘’buy now while stocks last’’ mentality developing.
Last weekend the broadsheets discussed whether tax relief at the rates of 40% and 45% will be abolished altogether, leaving just the basic rate available or whether a new melded rate of tax relief of between 25% and 35% would continue for higher rate tax payers. Despite all this speculation we of course will not know the outcome until 16th March 2016.
What is also interesting is the timing of any change – there is some precedent of pension changes being made on Budget Day itself but this will massively complicate 2015/16 self-assessment returns. On the other hand if the cut is announced to take effect from 6 April 2016 then a mad rush to gain maximum relief before April is bound to ensue – this on top of an already worrying capacity crunch as 30,000 employers per week put in place their workplace pension schemes this year and next.
Cut in Tax-Free Lump Sum
The maximum lump sum that may be withdrawn from a personal pension plan is currently 25% of the accumulated pension fund and it has been at this rate for decades. The rumour that this rate will be cut is almost perennial but there could be a more pronounced reason for the Chancellor considering this now. £2.5 billion was withdrawn from pension plans as cash lump sums between April and October 2015 and whilst we do not know exactly how much of this was paid out tax-free it will certainly be at least £625 million – if this was left in, the Treasury would be collecting a tax charge on the funds invested – this is worth £10 billion p.a. on all UK pension funds invested and the Chancellor will not like the look of this draining away year on year. True, he has received a short-term boost in tax revenues from individuals cashing in their pension funds but a permanent loss in tax revenue is sure to irk him.
If the tax-free lump sum is cut I would expect this to be effective from Budget day.
Cut in the Lifetime Allowance
George Osborne has already cut the Lifetime Allowance (the maximum pension fund you may accumulate before it is subject to a tax charge) to £1million effective from 6 April 2016 but there is some conjecture that this may be revised downwards as a package of cuts. In my view this is unlikely given that the Lifetime Allowance has not only been re-set from April 2016 but is also projected to be increased in line with CPI from 2018 onwards.
With this Chancellor, however, you never really know?
