Tuesday, 17 July 2018 10:48

Nicola Watts: Stop messing with pension tax relief

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Chartered Financial Planner Nicola Watts APFS Chartered Financial Planner Nicola Watts APFS

Once gain the question of whether there will be changes to pension tax relief raises its ugly head.

Baroness Buscombe, a spokesman for the DWP, recently said that the government intends to “examine the process for payment of pensions tax relief.”

AJ Bell have also said that in light of Theresa May’s £20bn NHS funding promise there were fears savings incentives will be “caught in the crossfire.”

Once we have Brexit out of the way, could pension tax relief and pension taxation generally, be a target? But how might it change? Who might it impact?

There are thoughts that instead of different rates of tax relief, one flat rate might apply, lifting savings levels for those on low incomes, increasing tax relief for basic earners, but with rates for higher earners being cut.

This will certainly make pension contributions for lower earners more attractive. And, let’s be honest anything we can do to encourage saving with attractive tax relief options is positive.

However, my feeling is (and without understanding the figures involved) that this could in fact result in increased liabilities for government. Will any increase in tax relief for basic rate taxpayers be offset by a reduction in tax relief for higher rate taxpayers?

Will the reduction put off higher rate taxpayers saving as much? My instinct is that although it will be less attractive, I’m not sure that this will actually make much difference to the levels of savings, and government may find itself having to fund tax relief on the same levels of contributions, with the overall level of tax relief maybe even being a little higher.

So, what else might change instead?

One topic of continual discussions is potential changes to tax free cash. Only last week, I was speaking with a client adamant on taking the maximum tax free cash from all his defined benefit pensions, despite this reducing his secure levels of income and despite having a large personal pension which could provide more than sufficient for his future needs. He was adamant that scrapping of tax free cash was very likely. Needless to say, we had quite a debate on the matter!

However, would any government be brave enough to scrap tax free cash? To cut it overnight would raise a lot in the way of tax revenues, but would no doubt create a storm. What’s maybe more likely is that there would be a cut in or a cap on the lump sum for the future only, maybe keeping the current 25% levels for premiums prior to a certain date, and then changes for any contributions thereafter.

In other news, we’ve seen the reductions in the Lifetime Allowance from £1.8m in 2012 to as low as £1m, with the current level being £1,030,000. We’ve also seen a reduction in the Annual Allowance from £255,000 in 2011 to £40,000 by 2014, and now as little as

£10,000 for higher earners, with the more recent introduction of the Tapered Annual Allowance.

More concerning is that if government continues to tamper with tax relief, constant changes in pensions undermine confidence in pension saving.

Please, please, please can we just stop messing?


Nicola Watts APFS Chartered Financial Planner, Chartered Wealth Manager, CFPTM Chartered FSCI - director of Jane Smith Financial Planning

After joining the family business in 2000, Nicola qualified to provide advice in 2001, and has been a director of the business since 2006. Since the retirement of her mother (Jane Smith), Nicola bears sole responsibility for the management of the firm, and the advice provided to clients. Nicola is married to David and has two young children, Emily and Olivia, and Poppy the black labrador.

 

 

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Read 1688 times Last modified on Tuesday, 17 July 2018 11:46
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