A “raid on pensions” – Rumours or reality?
As the UK continues to enjoy the easing of restrictions and with “Freedom Day” on the horizon, there is something else on the horizon, that being the big question on everyone’s lips – how on earth are we going to repay the cost of coronavirus? The Office for Budget Responsibility estimates the government has borrowed £355 billion to cover the costs of the pandemic.1 So, some serious thought needs to go into it!
For those who were able to work from home, 2020 was a year of makeshift offices, Joe Wicks and Zoom office quizzes. For those unable to do so, the ‘Coronavirus Job Retention Scheme’ launched in April 2020, supporting a total of 11.5 million jobs at various points2. To put that into context, over 1 in every 4 working-age adults received some form of government financial help during the pandemic3.
The Telegraph4 has recently reported that the Treasury is considering a “raid on pensions” to help raise funds to repay costs, with three main areas being reviewed. Let’s take a look at these one by one.
What are the proposed changes?
The first proposal is reducing the Lifetime Allowance (LTA) down from the current £1,073,100 to £800,0005, a potentially significant drop. The LTA is a limit on the amount you can save into a pension, with anything above the LTA subject to a tax charge at certain points, mainly when benefits are taken or on death. Reducing the LTA will impact those who are actively saving for retirement, not only those who can afford to maximise pension contributions but also those who have achieved strong investment growth over the years. As an example, a 30-year-old contributing £2,000 per month with investment returns of 4% p.a. would exceed their LTA by age 50.
There has also been a proposed reduction of tax relief applied to pension contributions. The current tax relief system depends on how much you contribute and how much you earn. Basic rate taxpayers benefit from a £20 uplift for every £80 they contribute (subject to earnings and an annual limit on contributions), which represents 20% tax relief. Higher and additional rate taxpayers can also claim back extra tax relief through self-assessment (up to 46%). There are claims that the government plans to scrap this and introduce a flat 30% rate for all taxpayers6. This could of course have a rather negative impact on those higher earners but, on the other hand, could mean basic rate taxpayers are slightly better off.
The last area under review is the State Pension. Under the triple lock promise, the government must increase the State Pension every year by the highest of average UK earnings growth, inflation or 2.5%. However, due to an unexpected growth in wages (economists predict this could rise to 8% in July7), the government is now facing a cost of £4 billion to cover their pledge. This begs the question – how long can the triple lock continue?
Should I be worried?
Changes in pension legislation is nothing new, with rumours and speculation arising at almost every budget. However, debt levels have not been this high since the 1960s, when the UK was paying off the cost of World War Two8, and it seems likely that there will be some attempt to recoup the government stimulus costs.
A government spokesperson has rejected the triple lock threat claims and noted that “they plan to stick to that commitment”.9 However, there have been no official statements regarding the taxation of personal pensions or the tax relief system.
What should I do?
It is unlikely that any changes will come into effect immediately ahead of the Autumn Budget. In advance of any announcements, you may wish to take this time to review your own personal situation. With limited travel and leisure options available over the last year, you may have been fortunate enough to see an increase in your savings and disposable income.
Whilst it is certainly tempting to use these savings to purchase a “green list” holiday ticket, investing excess funds in a pension now can help build a solid basis for your retirement. As mentioned, contributions will receive tax relief (up to 46% depending on your earnings) and any investment growth within the pension is tax-free.
You may be able to make a larger contribution by utilising ‘carry-forward’, which allows you to use up any unused annual allowance from the three previous tax years. There are several conditions which must be met, and you will only receive tax relief up to the amount you currently earn.
It is also possible to apply for a “protected” LTA, depending on the value of your pension and/or whether you have made contributions since 2016. LTA protection provides a personalised allowance greater than the standard LTA, meaning that you will have a higher limit on the amount you can save in your pension before triggering a tax charge. It’s important, of course, to seek financial advice to ensure this is a suitable option for you.
Finally, you shouldn’t overlook the various other products that can be utilised for retirement planning, such as Individual Savings Accounts (ISAs). Investing across a wide range of products not only protects you against any adverse changes in legislation (avoiding the “all eggs in one basket” scenario), it also provides you with the opportunity to draw income as tax-efficiently as possible whilst in retirement.
To discuss the options available to you and to maximise the tax-efficiency of your investments and financial affairs, please get in touch with one of the Financial Planners at 7IM.
Pension and tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.