The pensions revolution is not over yet

This article is part of
Pensions Outlook – February 2016

The pensions revolution is not over yet

While 2015 saw some of the most radical changes to the pensions landscape in almost a century, pensions are the subject of continued Treasury scrutiny. In the Budget on March 16, the chancellor is likely to announce even more changes.

George Osborne’s post-election Budget last July introduced welcome flexibility to the way pensions can be accessed. He also introduced fairer ways in which valuable pension assets can be passed on to spouses or children, in particular with the abolition of the 55 per cent pensions ‘death tax’.

This has already started to alter the way investors view their pension assets and how they are reordering their tax affairs and succession plans to take account of the new flexibilities.

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Those who integrate the management of pension portfolios within the context of a family’s overall wealth and succession planning have adjusted the ways in which they advise clients who need to draw down on their capital or income – in retirement or otherwise – with Isas often assuming precedence now in the ranking of what to ‘hit’ first in certain circumstances.

Following a further consultation process last autumn, Treasury ministers are now considering a White Paper that contains options for changing the tax treatment of contributions, particularly the tax rebates for higher and additional-rate taxpayers, which are estimated to cost HM Revenue & Customs £35bn a year.

With reduction of the £1.5trn deficit in his sights, we have already seen the chancellor reduce the lifetime allowance that can be saved into personal pensions from £1.25m to £1m, and the annual contribution limit that qualifies for full marginal-rate tax relief tapering down from £40,000 to £10,000 for earners of £150,000 and above per year. Both of these measures come into force this April.

Following the White Paper consultation, it is thought the chancellor will target the tax relief on contributions. Options under consideration are for a flat rate of tax relief of 20, 25 or 30 per cent for all.

Another option floated by the Treasury is to abolish all tax relief on contributions and instead allow tax-free withdrawals from 100 per cent of a pension scheme, producing something akin to a ‘pensions Isa’. This would supposedly provide immediate tax gains for the Treasury, but at the expense of tax receipts from pension income drawn down later on.

While Mr Osborne can dress a reduction in tax relief as a redistributional move made in the interests of fairness, this idea, combined with those two measures already announced, will not be popular among many ordinary pension savers and will represent a massive disincentive to better-off earners.

It can only be hoped such measures can be introduced with an element of sensitivity to investor behaviour or there will be a huge rush for people to make contributions before the April (or other) deadline. This will put yet more pressure on hard-pressed pensions companies grappling with the effects of the new rules on drawdown.