The Telegraph has recently reported how Treasury officials are drawing up plans for a pensions tax raid in the autumn to help pay for heightened public spending during the Covid-19 pandemic.
According to their sources, three different reforms to the way in which pension contributions are taxed are being considered, which are:
- A possible reduction in the lifetime allowance – This is the limit on the amount of pension benefit that can be drawn from pension schemes, without triggering a tax charge. The current limit is £1,073,100 for 2021/22. Pension savings above that amount incur a 55% tax charge if they are withdrawn as a cash lump sum or 25% if they are withdrawn as an income.
- Individuals contributing to pensions getting the same rate of tax relief – Currently, basic rate taxpayers receive 20% relief, which means £100 is invested for every £80 paid into a pension. Higher rate taxpayers benefit from 40% tax relief. If everyone received the same relief, this could result in higher rate taxpayers losing out.
- New taxation on employer contributions.
Canada Life retirement director, Andrew Tully, said cutting benefits was sending the wrong message to savers already confused by the impact of 2020 on retirement prospects.
AJ Bell senior analyst Tom Selby said all three rumoured tax proposals were “risky” and “undermined the foundations being laid by auto-enrolment“.
In the Treasury Select Committees first report ‘Tax after coronavirus: the Government response’ they stated that:
“Changes to pensions tax relief in recent years have aimed to strike a balance between allowing the vast majority of savers to make significant tax-free pension savings and targeting incentives to save on those who most need Government support to save for retirement. Altering this balance could have profound and far-reaching impacts, and so while all tax reliefs are kept under review, more radical changes to pension’s tax relief would require careful consideration.”
Boris Johnson is, however, “fully committed” to the triple lock, his spokesman declared. The ‘triple lock’, increases the state pension by 2.5%, inflation or average earnings growth – whichever is highest.
This could mean pensioners may enjoy a good increase next April, much more than working-age benefits or the wider economy, due to wages bouncing back after the Covid-19 pandemic.
Comment
Today’s news is a reminder of the importance of revisiting and reviewing retirement plans. Tax changes are inevitable during savers lifetimes and as someone approaches retirement this can have a profound impact on people’s options and ultimately the income they may receive.
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Zoe Till is a Senior Associate and Chartered Financial Planner in our expert Investment Management team.
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