What’s In Store For Pensions?

With the tax-payer already squeezed, experts are warning pension holders that they might be in line for some amending of pension rules in order to raise additional tax revenue come next month’s Budget.

Whilst the Lifetime Allowance will already reduce to £1.5million from its present £1.8million in April, the Exchequer may also look to trim the Annual Allowance limit, currently £50,000 per annum.

A lower contribution limit, of say £30,000, would still provide significant scope to accumulate generous lifetime pension benefits. The ability to mop up unused allowance from the previous three years by way of carry forward and the ability of the scheme to then pay any arising charge, would largely alleviate the problem for those average paid employees in defined benefit schemes where a promotion or pay rise could potentially lead to a spike in that year’s contribution.

Another tax revenue raising area could be in the restriction of tax free cash available from pensions. A reduced maximum limit rather than the current maximum 25% of the Lifetime Allowance would leave a greater level of taxable pension income.

The removal of higher rate tax relief on pension contributions is an area favoured by the Liberal Democrat side of the coalition.

This move would see the elimination of 40% and 50% tax relief with a flat basic rate of 20% offered.

The Cabinet Minister, Danny Alexander claims that removing the higher-rate tax relief would save the Exchequer more than £7 billion and would make the system fairer.

Even restricted to those earning more than £100,000 the Treasury could save £3.6 billion.

However, Ministers should act with caution. At a time when pensions are being hammered by volatile investment returns, reduced annuity rates and employers cutting back on contributions and benefits due to the economic climate, a quick fix to the public finances could see the long term pension problem – and an already ticking, retirement savings time bomb – further exacerbated.

Making pensions less attractive to the decision makers of a company is only likely to lead to a greater apathy further down the workforce.

Even for many of those above average earners paying into retirement plans within the current pension structure, they are unlikely to accumulate sufficient funds to ensure a comfortable living in retirement.

It would be fair to say that pensions are unlikely to be made more generous and therefore those that can afford to should maximise the opportunities available to them sooner rather than later as any changes in the budget could make a significant difference to future retirement benefits.

Matt Hawkins

Chartered Financial Planner
MillionPlus Financial Planning