A “fundamental” shake-up of pensions tax relief was ruled out by the government this week, but experts are warning pension savers to expect more “slicing and dicing” of lifetime and annual allowances instead.
Major changes — which would likely have seen tax relief on contributions scrapped for higher earners — have been ruled out by the government for the time being.
Tax relief on pension contributions is currently pegged to the savers’ marginal rate of income tax. So top-rate taxpayers receive 45 per cent tax relief on their contributions, higher earners receive 40 per cent, and basic rate payers 20 per cent. Even non-taxpayers are entitled to claim basic rate relief on contributions.
David Gauke, the newly installed secretary of state for work and pensions, said this week that said he didn’t see “a particular consensus emerging” for an overhaul of retirement savings incentives.
“I wouldn’t see any fundamental changes in the near future,” said Mr Gauke, who moved to the DWP from Treasury, where he held various ministerial roles for seven years.
“The idea of reforming pensions tax relief in the previous parliament was somewhat daunting and recent events haven’t changed that.”
However, Mr Gauke indicated that major reforms were not completely off the table.
He was a minister in Treasury 2015 when former chancellor George Osborne floated radical proposals which could have resulted in the loss of upfront pensions tax relief for higher earners in an attempt to reduce the £21bn annual cost of tax relief for individual savers.
“I am not going to shy away from the fact that getting legislation through the House of Commons would challenging now,” Mr Gauke said on Wednesday, referring to the government’s weak majority.
“But that does give us an opportunity to now think about long-term reform, and to try and build a consensus.”
Pension experts said the government was now more likely to continue to “tinkering” with the lifetime and annual savings allowances, which govern how much can be saved into a pension and benefit from tax relief.
Since 2006, there have been more than a dozen changes to the lifetime and annual allowances which have been whittled down to to £1m and £40,000 respectively.
Calls for reform have been partly driven by concerns that the current system is not effective in encouraging savings among lower earners, as the lion’s share of tax relief is currently paid to the better off.
“David Gauke chose his words very carefully when he ruled out ‘fundamental’ changes to tax relief,” said Kate Smith, head of pensions with Aegon, the pension provider. “What this statement does not rule out is further slicing and dicing of the annual and lifetime allowances — which could be at risk again.”
Patrick Connolly, certified financial planner, with Chase de Vere, added: While it might prove difficult to get through legislation on fundamental changes to tax relief, it could be much easier to get cross party support to pass legislation which is perceived to impact only one wealthier pension savers, such as further cuts to the annual allowance or lifetime allowance.”
Ms Smith said a further reduction in the lifetime allowance to less than £1m would be “absolutely detrimental to pensions”.
“It would cause major complications for defined benefit pension schemes — which would include many public servants — due to the issues with calculating the allowance,” she said.
Such tinkering would stop short of the radical pensions reforms discussed in 2015, which included a switch to one “flat-rate” of tax relief for pension savers, regardless of their income tax band. This would likely have been set at around 30 per cent.
The idea of a “Pensions Isa” was also floated, which would have abolished tax relief altogether. Instead, post-tax income saved into Isa-style accounts would have attracted a government “top up” and could be taken entirely tax-free in retirement. April’s launch of the new Lifetime Isa for savers under 40 works along the same principles.
Find out more about Lifetime Allowance and how Capital Wealth Partners can help you to make the most of your allowance here.