Time to bite the bullet

Not good for Mr and Mrs Biggins from Dudley in the West Midlands (Mr and Mrs Average) who are already baffled by the complexities that accompany all things to do with pensions.

And not at all good for Mr and Mrs Bart-Williams from the shires (Mr and Mrs Well Off) who will see their scope to build a worthwhile retirement fund compromised by a series of tax attacks instigated by the chancellor.

But plenty of opportunities, I dare say, for shrewd financial advisers to get their hands dirty, pick their way through all the pensions detail, and demonstrate their great worth to their clients – or, even better, to new clients. Hurrah, times two.

The pension changes this year will come thick and fast, like bullets in a John Wayne western (El Dorado and Stagecoach spring to mind). Duck for a moment and you will miss a barrel full of them.

For a start, the lifetime allowance, which not long ago (2010) stood at £1.8m, is dropping from £1.25m to £1m from the start of the new tax year, exposing thousands of savers to a potential 55 per cent tax on some of their pension savings.

Unless the government does a U-turn (unlikely in austerity Britain), it will stay at £1m until April 2018 when the allowance will then increase in line with the consumer price index.

Shameful, I say, especially in light of the fact that we already have a contribution cap (£40,000 per tax year) in place, effectively putting a limit on the size of pension pots that people can build. Boos all round.

That is not all. Additional rate taxpayers, meanwhile, will see their ability to add to their pension pots seriously curtailed, again from the start of the tax year. For some, annual contributions will be capped at £10,000.

And of course, we will see the introduction of the new state pension in April which will pay £155.65 a week to those eligible to receive it (not as many people as we were first led to believe).

A recent investigation by my colleagues at Money Mail indicated that just one in three pensioners reaching state retirement age post-5 April will pick up the full amount because at some stage in their careers they ‘contracted out’.

Baroness (Ros) Altmann, pensions minister, under pressure from women born in the 1950s who are angry over having to wait longer for their state pension, has already admitted to a lot of ‘misconception’ surrounding the changes.

Yet the biggest change this year to the pensions landscape has yet to be announced. It is likely to come in March when the chancellor delivers his Budget and finally discloses the outcome of a review into pension tax relief launched last July. A review bizarrely labelled ‘strengthening the incentive to save’ when we all know the real objective is to cut the cost of the tax relief bill (running at a cool £50bn gross a year).

Although any overhaul will not be implemented straight away, it is extremely unlikely that the current tax relief regime – which we all know favours higher rate and additional rate taxpayers – will remain in place. As crooner Sam Cooke sang back in the early 1960s, ‘a change is gonna come’.

This is despite concerns by some influential pension organisations – such as the pensions and lifetime savings association – that any move to scrap the current tax relief system could plunge the country into a retirement crisis. I thought we were already in one.

A host of options are on the Treasury’s cutting room table. Everything from the taxation of pensions being put on the same footing as Isas (contributions taxed on the way in but all withdrawals tax-free) through to the introduction of a flat rate of relief (30 per cent seems to be everyone’s favourite).

A host of options are on the Treasury’s cutting room table

Indeed, some commentators are demanding an overhaul of Isas at the same time. Rachel Reeves, former shadow work and pensions secretary, recently wrote in a national newspaper that people saving into pensions should get 25p or 30p from the public purse for every £1 that they put in.

But a lifetime allowance of £500,000 should also be imposed on Isa investments with the annual limit frozen at £15,000 (as you know, it currently stands at £15,240) for the remainder of this parliament.

In revealing her battleplan, the Labour MP and member of the influential Treasury select committee added: “The government needs a long-term plan for savings to secure our economic and financial resilience and must reallocate tax relief to those who we want and need to encourage to save.”

I do not think anyone with an interest in pensions would disagree with the thrust of her argument, especially the need for a long-term savings strategy rather than the current ad hoc approach. Pensions have sadly become a political football and it is time to draw this game to an end.

Of course, no one yet knows how the Treasury will be true to its word and deliver change that strengthens the incentive to save.

So in the meantime, all financial planners can do is carry on as normal and continue to help their clients accumulate as much long-term wealth as possible, immune from the clutches of the taxman – the Mr and Mrs Bigginses of this country as well as the Mr and Mrs Bart-Williamses.

May 2016 be a good year for you all. Hurrahs all round – and down with pension boos.

Jeff Prestridge is personal finance editor of the Mail on Sunday