With the Government in need of a way to pay for the enormous cost of the pandemic, pensions are perhaps an easy target for the Chancellor.
The Treasury is reportedly formulating plans for a pensions tax raid in a bid to rescue public finances. According to the Telegraph, Chancellor Rishi Sunak and his team are considering three different reforms to pensions tax relief to help balance the books.
Slashing the lifetime allowance
The first of the reforms being considered is a reduction in the pensions lifetime allowance from £1.073m to £900,000 or £800,000. At the moment, savers who have pots in excess of the £1.073m are hit with a hefty tax charge of up to 55% when they draw down any amounts above the threshold. If this plan goes ahead, it means thousands of extra savers would be forced to pay steep taxes when they withdraw their pension as their pots would exceed the new lifetime allowance.
Scrapping higher-rate tax relief
This has been under discussion for some time and could see the Treasury introduce a flat pensions tax relief rate of 30% or even lower at 20%. Pensions tax relief is where the Government tops up your pension pot to encourage you to keep saving for your future. With pension tax relief, a portion of the money you would have paid in income tax goes into your pension instead. How much depends on whether you’re a basic or higher rate taxpayer. At the moment, basic rate taxpayers get 20% tax relief, whereas higher rate taxpayers get 40%. That means a £100 pension contribution would cost them just £80 and £60, respectively.
If the Treasury presses ahead with this plan, basic rate taxpayers will benefit but higher rate taxpayers will miss out.
Tax employer contributions
The final measure under consideration is a potential new tax on employer contributions. While the details of this plan are thin on the ground, forcing employers to pay tax on employee pensions contributions would heap costs on firms at a time when the economy is still in recovery mode.
What should I do?
In short, nothing at the moment. At present, we do not know if these plans being kicked around in Whitehall will come to fruition. According to reports, it’s unlikely that we will see any movement until the Autumn Budget in November – if at all. However, if you are already sailing close to the £1.073m lifetime allowance cap, it’s worth speaking with your financial adviser to assess your options. While everybody is different, if this is you then you may be better off diverting your pensions contributions into an ISA instead.
However, it’s always best to speak with a professional before taking such a huge decision which could have major consequences.