How chancellor could raid pension pots next week

How chancellor could raid pension pots next week

Chancellor Philip Hammond is expected to make changes to the annual allowance, with an eight out of 10 chance of this happening in next week’s Budget, according to analysis by Royal London.

According to the provider, the chancellor “faces a ‘triple whammy’ of revenue shortfalls, additional spending pressures and political weakness, which makes raising headline direct tax rates almost impossible”.

As a result, Mr Hammond is likely to look again to find savings in areas of public spending that are complex, and little understood, and which cost large amounts of money.

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These factors make pension tax relief a prime target for change in the Autumn Budget, according to Sir Steve Webb, former pensions minister and director of policy at Royal London.

According to Office for National Statistics figures, the government cost with tax relief increased £3.3bn between 2014 to 2015 and 2015 to 2016, achieving £38.2bn in this period.

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

Sir Steve argued that since 2010 the Treasury has been “raiding pension tax relief on an almost annual basis”.

He said: “With pressure to spend more, especially on young people, and with revenue shortfalls from a stuttering economy, a politically weakened chancellor is likely to turn again to tax relief as a source of less politically challenging revenue raising.

“Pension savers must long for the day when pension tax relief is a stable regime which supports long-term planning, rather than an easy source of ready cash for cash-strapped chancellors.”

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 £35,000, and then to £30,000.

“With contribution limits on Isas having been raised substantially in recent years to £20,000, the chancellor will feel he can cut the annual allowance with very limited political fallout,” Sir Steve said.

Several pension experts agree that this cut is most likely to be announced next week.

Royal London is also expecting the government to reduce the tapered annual allowance, from £150,000 to £125,000.

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.

“From the chancellor’s point of view, the attraction is that this is a complex area which will affect relatively few voters but which could raise significant amounts,” the provider said.

According to the analysis, there is a six out of 10 probability of a change to the lifetime allowance (LTA).

The LTA represents the maximum amount of money a saver can save in their pension pot - and benefit from tax relief at their marginal rate - before incurring an additional tax charge of up to 55 per cent.

The LTA will increase by £30,000 from April 2018 to £1.03m, since it was announced in the Budget 2015 that from 2018 to 2019 the allowance will be increased by inflation, the consumer prices index.