PensionsSep 13 2017

Budget forecasters predict annual allowance changes

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Budget forecasters predict annual allowance changes

The annual allowance - a limit on the amount that can be contributed to pensions each year, while still receiving tax relief – could be reduced from the current £40,000 to £30,000.

The government is also expected to lower the tapered annual allowance, from £150,000 to £120,000. This allowance is applied to high earners, and means that for every £2 of income above £150,000 per annum, £1 of annual allowance will be lost.

An HM Treasury spokesperson declined to comment if these changes to the allowances will be part of next budget.

Rachel Vahey, product technical manager at Nucleus, said that are “generally still concerns about the level of tax relief given on pension contributions”.

David Gauke, secretary of state for work and pensions, ruled out “fundamental” changes to pensions tax relief in July.

But Ms Vahey said she does not believe Mr Gauke’s announcement “rules out the possibility of smaller changes to the values of the various annual allowances”.

There has only been one year (2013/14) in the last eight years where the values of both the annual and lifetime allowances stayed the same, or where no new annual allowance was introduced, Ms Vahey pointed out.

Changes in allowances

Tax year

Lifetime Allowance

Annual
Allowance

Money Purchase
Annual Allowance

Tapered annual
allowance

2010/11

£1.8m

£255,000

 

 

2011/12

£1.8m

£50,000

 

 

2012/13

£1.5m

£50,000

 

 

2013/14

£1.5m

£50,000

 

 

2014/15

£1.25m

£40,000

 

 

2015/16

£1.25m

£40,000

£10,000

 

2016/17

£1m

£40,000

£10,000

Earnings > £150k

2017/18

£1m

£40,000

£4,000

Earnings > £150k

Sir Steve Webb, head of policy at Royal London, said that “the Treasury is broke” and needs to find more ways to increase its revenues.

Sir Steve cited ONS figures, which show that the government cost with tax relief increased £3.3bn between 2014/15 and 2015/16, achieving £38.2bn in this period.

This is the highest value of the cost with tax relief in the last 16 years.

Sir Steve believes that due to these figures a cut in the tapered allowance is going to happen, which the reduction in the annual allowance is “possible and less likely.”

According to Malcolm McLean, senior consultant at Barnett Waddingham, both cuts are possible and that they would imply that “more people lower down the income scale start to be affected”.

He said that a cap of £30,000 on the annual allowance is “still quite a bit higher than most would be looking to pay into their pension in a normal year”.

But for those on irregular earnings, such as the self-employed, it would “restrict the amount they can pay in on good year looking to catch up on earlier bad years,” he said.

Similarly, it could catch out many more in a defined benefit scheme “in a year when they get promoted and get a reasonable pay rise, leading to them exceeding the limit and getting a tax penalty,” he added.

Mr Mclean said that the tapered annual allowance is “total nonsense, ridiculously complex and includes in the limit other income not just pension contributions”.

According to a survey by Suffolk Life, eight out of 10 (84 per cent) advisers had significant issues with the new annual allowance tapering rules.

Since 6 April 2016, individuals who have taxable income for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted.

It will be reduced, so that for every £2 of income they have over £150,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction will be £30,000, so anyone with income of £210,000 or more will have an annual allowance of £10,000.

High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.

Mr Mclean said: “A further reduction on the level will be another reason to avoid pension saving by middle to high earners for fear of being hammered by tax for no good reason”.

For Jonothan McColgan, director and chartered financial planner at Bath-based Combined Financial Strategies, these cuts, if applied, will “drive people away from pensions”.

He said: “It will drive those tax conscientious clients higher up the risk scale to get more income tax relief.”

According to Mr McColgan, savers are tired of the government tinkering, which is driving them away from pensions.

“Every single budget and autumn statement politicians meddle with the rules around pensions, which makes it impossible for the layman to understand,” he concluded.

maria.espadinha@ft.com