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Hidden in the pre-budget detail was the shock announcement that the lifetime and annual allowances for pension saving will be frozen for five years from 2010. This is deeply unwelcome as it introduces an element of uncertainty into long-term pension planning.
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The maximum pension fund that can be built up in a tax efficient way is currently £1.65m (2008-09) with any excess taxed at 55 per cent.
The government has announced that this lifetime allowance will be frozen at £1.8m between 2010 and 2015. This means anyone with a pension fund of £1.25m today who achieves reasonable fund growth of 6.5 per cent, will face a 55 per cent tax charge on some of their fund by 2015.
Pensions experts at Standard Life say that some people may still want to save more than £1.8m and pay the 55 per cent tax charge because it could be better than saving through net fund investments such as unit trusts or open-ended investment companies (Oeics), particularly for those paying 45 per cent income tax in future.
But it's not all bad news for pensions. The reduction in VAT will provide a small reduction in fees for some self-invested personal pension (Sipp) investors who invest in commercial property. Also customers of those Sipp providers who charge VAT on their administration fees (such as Hargreaves Lansdown) will see VAT on charges fall by 2.5 per cent.
Meanwhile, higher earners worried about the hikes in income tax and national insurance from April 2011 (PricewaterhouseCoopers calculate anyone earning £40,000 a year will pay an extra £1,000) can save money by making pension contributions by salary sacrifice and bonus waiver.
For more comment on the pre-Budget report, see Great politics, questionable economics and Can Darling's package work?
For more on retirement planning, see our free Investment Guide to pensions
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-IC-1.9.0c-prod - 15/05/2009 11:00:33 - stuart.turner
