Budget 2012 pension annual allowance cut?

The FT has reported that Chancellor George Osborne is considering a cut in the pension annual allowance from the current level of £50,000 to £40,000 when he announces his Budget on 21st March 2012.

The move would follow the previous cut in this allowance from £255,000 to £50,000 which was implemented last April.

A cut in the annual allowance to £40,000 would go some way towards funding an increase in the income tax personal allowance, which is an important objective of the coalition government. Reducing the annual allowance from £50,000 to £40,000 is understood to save the government up to £600m a year.

Under the current rules, investors can receive income tax relief on pension contributions up to £50,000 per tax year. It is also possible to carry forward any unused annual allowance from the previous three tax years.

Income tax relief on pension contributions for higher earners is a very hot political topic currently, with pressure from various sources to slash this valuable relief.

Whilst a cut in the annual allowance from £50,000 to £40,000 (or lower) would silence some critics, we believe it could further damage confidence in pensions savings at an important time for retirement planning.

Each time the government makes changes to pension rules and limits, they undermine the confidence of investors in using pensions as a long-term investment vehicle.

We have previously called for pensions policy to be handed over from government to an independent committee who can introduce some stability to this important policy area.

The government should learn to leave pensions alone. Constantly re-writing the pensions rule book is preventing people from saving for longer lives and longer times spent in retirement.

If you are considering making a large pension contribution this tax year, we would suggest making it before the Budget on 21st March to ensure you are not restricted by any sudden rule changes. Do speak to us if you need advice.

Photo credit: Flickr/HM Treasury