Personal PensionJan 20 2016

Act before flat rate pension tax relief is introduced

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Act before flat rate pension tax relief is introduced

Middle class savers need to act now on retirement savings before the flat-rate pension tax relief is introduced and take the tax relief while it lasts, Nigel Green, chief executive of deVere Group, has warned.

“Those paying higher rates of tax have traditionally been awarded more relief on their retirement savings. It would seem this time-honoured practice is to be axed.

“Therefore, middle class savers who have been prudently putting money aside for their retirement are going to be hit by [Mr] Osborne’s plans.”

Middle class savers who have been prudently putting money aside for their retirement are going to be hit.

Mr Green’s comments came after the Financial Times reported pension tax relief for those on higher incomes looked set to be ditched as part of HM Treasury’s overhaul of the pensions system.

Chancellor George Osborne is expected to announce a move towards a ‘flat-rate’ government contribution in his March Budget, according to the FT.

Currently workers enjoy pension tax relief at the same rate as their income tax, but the change would see a shift towards a pension savings incentive of between 25 and 33 per cent for everyone, people close to the Treasury have said.

Mr Green warned those currently receiving between 40 and 45 per cent tax relief, could see a significant drop in their retirement funds, while those seeking to make larger one-off pension contributions to make the most of retirement savings might be wise to “consider doing so sooner rather than later.”

A review into pensions tax relief was launched last summer, which found that retirement tax relief cost nearly £50bn a year.

A HM Treasury spokesman said: “We have not decided on whether or how to reform the system and are considering all options, including retaining the current system. We are considering the responses and will respond at the Budget.”

Steven Cameron, regulatory strategy director of Aegon, said moving to a system where everyone receives the same tax relief top-up whatever income tax they pay would be another landmark pension change from this government.

Assuming the single rate is set somewhere between 25 per cent and 33 per cent, Mr Cameron said it would mean pensions become more attractive to low and modest earners as the government would be giving a bigger boost every time a basic rate or non-taxpayer pays into their pension.

He said: “Aegon’s research indicates 60 per cent of the population would be in favour of a move to a flat rate if it was set at 33 per cent.”

Andy Zanelli, head of retirement planning at Axa Wealth, said a flat rate would level the playing field. “It could be the boost to pensions simplification we’ve needed for a long time. Pensions need to provide an income that could last for 20, 30 or even 40 years, so it’s vital we remove any barriers that prevent people from saving and investing – a complex tax system where few understand the benefit is one of them.

“While it will provide some challenges in terms of system modifications and interactions with AE, it should benefit basic rate taxpayers and make saving for the long term more appealing to people who just aren’t saving enough, if at all.

David Trenner, technical director of Intelligent Pensions, said: “There is no question that people who are subject to higher rate tax should pay a contribution if they have available cash. They could lose out significantly if they wait to see what happens. For those over 55 there is the added reassurance that if they run into financial difficulty, they can access the fund at any time, with 25 per cent of it tax free.

For those with income - income not just earnings - over £150,000 the Tapered Annual Allowance being introduced in April is already a good reason to pay a large lump sum into their pension, although the reduction in the LifeTime Allowance to £1m needs to be taken into account.”

Martin Tilley, director of technical Services at Dentons Pension Management, said: “As always the devil will be in the fine print, as there are obviously administrative complications to overcome in such a move. Particularly for employer contributions and those remaining DB schemes. Treatment from a tax perspective of unfunded schemes will also need to be innovative.

“My worry, as has been borne out in the past, is that whatever announcement we have will not fully address all of the complications caused by the change and the timescales for implementation will be both too short and under estimated in terms of complexity and costs.

“What we do need is clarity and unity in the way any change is presented and communicated and that this be in a positive rather than negative light.”

Claire Trott, head of pensions technical at Talbot and Muir, said: “If brought in, it would mean that net pay arrangements would need to be amended to ensure that full marginal rate relief isn’t given and it would, therefore, be simplest to move entirely to relief at source.

“Salary sacrifice will become an issue if flat rate relief option is taken up because the way in which salary sacrifice works means individuals are getting full marginal rate relief because they have swapped taxed income for a pension contribution made by their employer. They also benefit from reduced personal and employer National Insurance contributions, some of which may be passed on by the employer as additional savings.”