Reading the Green Paper – “Strengthening the incentive to save: a consultation on pensions tax relief” it was almost impossible not to conclude that we were in for a period of great change.
At the very least we could expect the removal of higher rate income tax relief on pension contributions.
We might also possibly expect the removal of basic rate income tax relief to be replaced by a flat rate system; maybe £1 for every £3 saved?
The Green Paper implied the possibility of further more nuclear change – the so called pension ISA where there was no income tax relief on pension contributions at all but the promise of a tax free retirement income.
The numbers were quite frankly staggering.
Low hanging fruit of anywhere between £7bn and £22bn of revenue savings each year available to a Chancellor brave enough to force through radical change.
Budget day on 16th March seemed like a realistic deadline date to make a pension contribution if you were able to benefit today from higher rate income tax relief.
It also seemed like a good deadline date if you were fearful that the Chancellor was going to mess around with the much loved tax free cash lump sum.
Chancellor U-Turn on Pension Tax Relief
All of this is now somewhat academic.
At a stroke the Treasury have announced that the Chancellor will not make these discussed changes. Phew!!
Leaving aside the politics of all this – fear of a Tory revolt against a Chancellor with an eye on the job of the Prime Minister and of alienation of older people more likely to vote in favour of continued EU membership – what a waste of time and energy.
But change is still on the agenda and there are two things that are going to happen, unless there is another change of heart from the Chancellor;
Lifetime Allowance reduction
From 6th April 2016 the Lifetime Allowance for pension pot accumulation is reducing from the current £1.25m to £1m before more penal rates of income tax apply.
However, there will be the chance to apply for protection so that you benefit from the current higher Lifetime Allowance.
Fixed Protection 2016 will allow you to benefit from a lifetime allowance of £1.25 million regardless of the current value of your pension pot.
But you will not be able to accrue any further benefits or pay any further contributions after 5th April 2016.
So if you want this protection you will need to take action and stop accruing or making further contributions.
Individual Protection 2016 will allow you to protect the value of your pension pot at 5th April (as long as it is more than £1m as at that date) and you will be able to continue to contribute to your pension pot and only the excess over your individual protection figure will be subject to the higher tax take.
You should certainly take advice if you think that your pension pot is likely to exceed the Lifetime Allowance in the future.
Of course the Chancellor could simply abolish the lifetime allowance in the Budget but I may be allowing my optimism to triumph over the reality of the tax take he enjoys from that anti-aspiration limit.
High earners and those who have paid significant pension contributions might also need to consider acting before the end of the tax year.
There is a limit on pensions contributions of £40,000 per year with some scope for carrying forward unused contributions from previous tax years.
Next tax year those earning more than £110,000 a year will have a lower limit than £40,000 so some advance planning might make sense.
Of course, having abandoned his abolition of higher rate income tax relief on pension contributions, it would not surprise me if he made a further move on contribution limits, perhaps reducing the contribution limit to say £20,000 a year.
This doesn’t cause a problem for basic rate tax payers but does reduce the cost of higher rate income tax relief for higher earners.
We shall see!!