Radical changes to pension tax relief are being predicted but we think less dramatic tweaks are likely.
With the prospect of a Budget looming in November, rumours are inevitably circulating that the government is intending to scrap the tax relief afforded to higher earners on their pension contributions, or certainly clamp down on it.
Indeed, it is hard to remember a run-in to a Budget during recent years when such fears have not figured prominently. The current costly pension tax relief system, which is often criticised for directing much of the relief at the wealthiest individuals who need it least, always seems a tempting pot to raid for a Chancellor seeking to raise billions of pounds.
This year the need to safeguard against the possibility of a no-deal Brexit by having funds available to boost the economy probably makes the temptation greater than ever.
The recent publication of a paper by Michael Johnson from influential think tank the Centre for Policy Studies has further fuelled speculation by arguing that tax relief on pensions should be abolished and replaced with explicit bonuses on contributions.
In the report, entitled Five Proposals to Simplify Saving, Johnson maintains that the current system of tax relief is incomprehensible to the general public and points out that 68% of it goes towards higher and additional rate taxpayers.
There are obvious dangers in predicting what will happen at any Budget. After all, who could have forecast the 2014 pension freedoms bombshell announced by George Osborne that constituted the most dramatic overhaul of the pension system in nearly a century?
But we think it is unlikely that anything very radical will be announced at this point in time and that, even if it is, it will almost certainly be kicked into the long grass until after Brexit is complete.
Scrapping the current system could have an adverse impact on auto-enrolment, and it is hard to see how a government could allow this to happen to something it has invested in so heavily. The fact that much of the tax relief currently goes to defined benefit schemes, the vast majority of which are in the public sector, would also have all sorts of implications for the government as an employer.
Perhaps most importantly of all, it is not easy to envisage how the necessary Parliamentary time could be found over the Brexit period to achieve something as contentious and time-consuming as abolishing higher-rate tax relief.
At Chase de Vere we therefore believe the most likely scenario will be further tinkering around the edges through manipulation of the Lifetime or Annual allowances, which restrict the amounts that can be paid into pension schemes tax-efficiently.
The Lifetime Allowance, which currently stands at £1,030,000 after having been reduced from as much as £1,800,000 in 2010/11, seems the least vulnerable, particularly following the reverse on public sector pay freezing.
The simple fact of the matter is that any further reductions could detract from the ability to enjoy what many people would consider a comfortable retirement.
£1 million may sound a massive amount of money but, with life expectancies having rocketed, a 65-year-old in good health purchasing an annuity nowadays is unlikely to get significantly more than £20,000 a year if they want to include index linking and a pension for a surviving partner.
Even the Annual Allowance, which currently stands at only £40,000 after being as high as £255,000 in 2010/11, doesn’t appear to allow that much room for further manoeuvre.
The same could also be said about the Tapered Annual Allowance that applies to those with income including employer pension contributions of over £150,000 a year (and ‘income’ excluding all pension contributions over £110,000 a year).
Since April 2016, for every £2 of ‘income’ they have received over £150,000 their annual allowance has been reduced by £1.
lthough the maximum reduction is £30,000, this means that anyone with an ‘income’ of £210,000 or more will have an annual allowance of only £10,000.
However, it is not hard to see the Chancellor indulging in a little further tweaking in these latter areas, so employers should ensure that they make higher earners aware of the importance of maximising the reliefs currently available.