By Fiona Tait, Technical Director, Intelligent Pensions
According to the Treasury ‘now is not the time to be outlining long-term plans’, but it is also a recognition that more spending will be required to support UK workers and the businesses that employ them. As the Treasury is not known for giving money away without the prospect of balancing payments, the cancellation of the Autumn Budget makes future tax increases rather more likely than less.
There should be no sigh of relief from the pension industry, or from savers, we should instead be concentrating on getting the most from current tax legislation before it is changed. The only bit of good news is that we now have slightly longer to plan.
The argument for making pension contributions is stronger than ever
If we accept the argument that tax changes are likely, and that they are only going to go up, then putting money aside now makes sense. Clearly for some people this will be impossible as their earnings decrease or disappear, however there is growing evidence of more fortunate workers who are able to continue to operate from home and are in fact spending less on travel and the office lunches. These savings could easily be diverted into a pension and attract both tax relief and tax-efficient growth on their money.
Based on fairly widespread rumours ahead of the cancelled budget this may be the last chance for additional and higher rate tax-payers to benefit from marginal rate relief.
Why now
The two most likely scenarios for pension tax relief going forward would seem to be a reduction in the Annual Allowance (AA) or a move to a flat rate of tax relief. Both of these moves would reduce the amounts claimed back from the Treasury and would have the additional advantage of being politically acceptable to middle Britain who are likely to see it as a ‘tax on the rich’.
There is certainly scope to reduce the AA to levels which are deemed affordable by anyone not fortunate enough to be in an active final salary scheme or to have ‘spare’ income of over £3,000 a month. Even more positively, a reduction in the AA could be used as a simplification tool, with the lower limit being offset by a removal of all the headaches and anomalies generated by the Lifetime Allowance (LTA) and AA taper.
Moving to a flat rate of tax relief has also gained more popularity based on both simplification and the idea that it treats everyone the same regardless of wealth. The question is of course where the rate would be set. The Treasury will naturally want to limit costs and may favour simply limiting relief to the basic rate, however setting it higher than this would give a boost to the majority of pension savers and possibly incentivise them to save more while at the same time lessening the impact on higher rate taxpayers.
What is certain though, is that if it happens tax relief of 40% and above will be a thing of the past.
But what if benefits change?
A frequent excuse, I mean reason, given for not saving into a pension is the constant changes to the rules which successive governments have brought in. Simplification was supposed to put a stop to this but the ‘low hanging fruit’ pension tax relief proved to be too much of a temptation with changes to both contribution and benefit limits. The former is bad enough, but people can at least change their contributory behaviour following a budget. If their money is already invested and the benefit rules change, they are more or less stuck with it.
One of the top concerns expressed by clients ahead of nearly every budget is that tax-free cash might be cut, leading some to ask if they should withdraw their funds before they actually need them. This is clearly still a possibility however there are 2 mitigating factors to take into account:
1. Tax-free cash is one of the most popular and understood pension benefits and any changes would be very noticeable.
2. If the Government were to change the benefit rules they would almost certainly include some protection for existing funds. This has been done each time the LTA was lowered, in recognition of the fact that previous contributions were made with the expectation that benefits would be in line with the rules applicable at the time.
Summary
The cancellation of the Autumn Budget does not make tax cuts less likely it merely puts them off. This provides an opportunity for higher and additional rate taxpayers to invest in a pension and benefit from marginal rate tax relief.
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