Budget warning! Pension changes are likely – so we are advising it’s better to get ahead of the game.
As the pension arena continues to be used as a political football, it is widely expected that the Chancellor, George Osborne, has already drawn up plans to overhaul pension tax relief. With that in mind, it is worth considering how you can prepare for any changes that may adversely affect your pension situation.
What is likely to happen to your pension?
Last year the Chancellor announced he wanted to provide a simpler and fairer pension’s tax relief system, and as a result, it seems likely that tax relief on pension contributions will be reduced.
He is reportedly considering introducing a flat rate to replace the current system of 40% tax payers receiving 40% relief on their contributions, while 20% tax payers get 20%.
There are also rumours that the Lifetime Allowance (LTA), which currently stands at £1.25m and is due to reduce to £1m from 6 April 2016, may be scrapped as a sweetener to wealthier pension investors.
However, other changes may include removing the ability to carry forward allowances from previous tax years, as well as the removal of salary sacrifice arrangements and net pay schemes, which provide immediate relief at an individual’s highest margin. Indeed, for the Treasury to implement a flat rate tax relief system, it is difficult to see how these schemes can survive.
Why is a change likely to pension’s tax relief?
In the 2013/14 tax year, the gross cost of registered pension scheme tax relief was £35 billion, while as it stands, our national budget deficit is £69.5 billion. So it is no surprise that Mr Osborne is looking to save money in order to achieve a budget surplus by 2020.
By cutting relief for the 4.6m higher rate taxpayers who earn more than £42,385 annually, the introduction of a new flat rate of, say, 25% relief, would save around £6 billion per year.
When is a change likely?
If Mr Osborne is indeed going to announce a flat-rate system, then it is possible it will happen on ‘Budget Day’ 16 March 2016, to prevent higher rate tax payers from grabbing any last share of the higher rate relief before it is abolished. Equally, a period of grace may be allowed so financial institutions can process yet another pension change.
How should you act?
If you are a higher rate tax payer, and are considering a one off contribution, you should consider increasing pension contributions by as much as your allowances permit, including any unused allowance from the last 3 years, before 16 March 2016. Whilst there are no guarantees, this should ensure that you claim your personal entitlement to higher rate allowances.
If you feel you might be affected by the potential changes and you want to look at the options available to you, please contact your consultant at Cullen Wealth to explore your situation in more detail.