Pension tax relief, particularly for higher rate taxpayers, is a hugely used element in the Financial Planner’s arsenal but it’s future may well be in jeopardy along with the Treasury’s commitment to fund pension saving with generous tax benefits.
The Autumn Statement offered few direct threats against pension tax relief but did hint that this “expensive” tax benefit, as it calls it, was on the Treasury’s radar. A number of pension experts including Tom McPhail of Hargreaves Lansdown and our own John Moret of moretoSipps have echoed the view that pension tax relief may be cutback sooner rather than later.
Inevitably the naysayers have responded with cries of scaremongering and accusations that some are just trying to selling more pensions by inventing a “buy now while stocks last story.” They say we’ve heard this all before and maybe we have but the tone from the Treasury has changed and the threat is serious and perhaps more imminent.
Key here is the Treasury’s direction of travel on pension tax relief and pension benefits generally. It has, unwisely in my view, cut back on many incentives for, particularly higher rate, taxpayers to invest in their pension. The Lifetime Allowance scaling back, the imminent cut to the Money Purchase Annual Allowance announced in the Autumn Statement and other moves have undermined pension saving.
The industry and its trade bodies have been poor in fighting back and that’s just encouraged the Treasury to go further. Pension tax relief is clearly one of its potential targets to save money. I doubt it will be axed overnight but the Treasury’s policy of ‘death by a thousand cuts’ seems not unlikely.
The first stage would be a trimming back of higher rate relief to basic rate. This would save the Treasury billions each year and would be seen as protecting the relief for the majority of taxpayers and being fair to everyone even if it’s not. I can’t see protests in the streets over this one but it would mark an inexorable shift in policy.
So should planners be worried? Well inevitably there will be more complication and more work for planners who will be asked to find retirement solutions that go beyond pensions but for clients, particularly better off ones, it’s bad news.
So where next? Well higher rate relief is still available and the Treasury has issued its formula “no plans to change” statement on the threat so it can be used by planners as a key element for the time being. It’s also possible that the Treasury may have something else up its sleeve such as cutting back the tax free lump sum or restricting relief in other ways.
Overall though it’s not good news for pensions which are increasingly being targeted by the Treasury for budget savings – a policy at odds with the public statements of government ministers placing pension saving and other long term saving at the heart of economic policy.
We are moving into an era when governments are viewing pensions as little more than just another savings pot. This is a shame because there is a fundamental different between saving for retirement and saving for a new car. The two are not interchangeable.
Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with over 20 years of experience
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