Higher earners have been urged to top up their pension pots before the Autumn statement on 5 December after reports that George Osborne is planning a raid on pensions tax relief to balance the books.
According to the Financial Times the Chancellor is considering reducing the annual pensions threshold from £50,000 to £40,000. While this is the most likely outcome and would probably come into effect from next April, pension experts are not ruling out an immediate restriction on the rate of tax relief in spite of the complexity this could inflict on investors.
The Liberal Democrats have already been vocal in their opposition of higher-rate tax relief. From a tax perspective pensions are one of the most attractive long-term investment vehicles available today, especially for higher rate and additional tax-payers.
In his first emergency Budget in 2010, Mr Osborne cut the maximum annual pension contribution exempt from tax from £255,000 to £50,000.
A new threshold of £40,000 is expected to raise about £600 million, while a further cut to £30,000 would raise £1.8 billion. Pension experts warn that any further cuts in pension tax reliefs would have significant consequences, not just for higher earners.
Alex Henderson, tax partner at PwC, says: "As well as undermining confidence in the stability of the pensions system for everyone, reducing the annual allowance could penalise those who deliberately planned to increase pension savings later in life, rather than save a little each year."
Jason Hollands, managing director at Bestinvest, adds: "£40,000 may seem like a lot of money. However, the reality is that many middle class investors have to play serious catch-up with pensions as they approach retirement, making bigger contributions only once their children have grown up and their mortgages are paid off and they are confronted by the reality of how much they need to boost their fund by to generate a decent retirement income."
Others warn that cuts to annual allowances would further undermine final-salary (defined-benefit) pensions. Tom McPhail, head of pensions research at Hargreaves Lansdown predicts: "If the government does reduce the Annual Allowance to £30,000, within five years there’ll not be a single open final-salary pension in the UK." Marc Hommel, pensions partner at PwC, says: “Depending on the level set and their salary and employment profile, there could be complications for defined-benefit scheme members who could face an annual benefit-in-kind charge on their increased benefits."
Meanwhile Mr Hollands points out that for those currently liable to the 50 per cent rate of income tax, there is an added incentive to use a pension this year as this tax rate is set to drop to 45 per cent next April. By investing up to £50,000 in pension this tax year, and potentially also mopping up any unutilised allowances from the previous three years under a rule known as 'Carry Forward,' investors can potentially eliminate their 50 per cent tax liability entirely and achieve £1 of investment for a net cost of 50p.
