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Topics: Tax relief| Budget 2012| Liberal Democrats| Tax| LTA| AA| Ashcourt Rowan| PwC| Raj Mody| PCLS| Baker Tilly| Treasury
The potential reform of pensions tax relief could provide several opportunities for advice...
The Liberal Democrats have pledged to raise the threshold at which people start paying income tax from current levels to £10,000.
However, to pay for it, experts have predicted the government will cut tax relief on pensions.
There are a number of ways to reduce the pensions tax relief bill, and each has potential consequences for your clients…
In October 2010, the government reduced the annual allowance (AA) on tax privileged pension contributions from £255,000 to £50,000 per year.
The lifetime allowance (LTA) was reduced from £1.8m to £1.5m. The government said the change would affect 100,000 investors, 80% of whom earn more than £100,000 per year.
The Lib Dems are in favour of cutting tax relief on pension contributions for higher earners to 20%, but the Conservatives are not.
Carl McColgan, chartered financial planner at Ashcourt Rowan, said: “The majority of pension tax relief granted by the government is at the higher rate and billions of pounds could be saved if they scrapped higher rate tax relief altogether or just for those earning over £100,000.”
Meanwhile, accountancy firm PricewaterhouseCoopers (PwC) said cutting contributions relief could mean higher rate taxpayers will lose £20 for every £100 invested.
For higher earners in final salary schemes, such a change creates a need for help completing a tax return.
This is because the extra tax charge could not be deducted easily at the outset, but calculated by a reference to the increase in pension benefits during the year and taxed as a benefit-in-kind.
Raj Mody, head of the pensions group at PwC, said if higher rate relief was cut “higher tax payers may be better off if they were simply paid cash and taxed on it as income.”
Another method is the possible taxation of the pension commencement lump sum (PCLS).
Pension savers can withdraw 25% of their fund at age 55 free of tax, costing the government of £2.5bn per year.
Changing this may leave the government with an administrative headache, Tom McPhail, head of pensions research at Hargreaves Lansdown said.
“It is difficult to decide when to begin taxing the PCLS,” he said.
“Taxing all lump sums in accrual now will upset savers, but implementing it at a later date means the government will make no money now.”
PwC said people approaching retirement could be seriously affected changes to the PCLS, as they often use all of the lump sum to pay off their mortgages before they retire.
Should PCLS become subject to tax, there could be a need for advice for these at-retirement clients.
The tax relief bill could be reduced by cutting the AA again to £40,000. However, Norman Dalgleish, senior financial planner at Turcan Connell, said this could penalise the wrong pension savers.
“Reducing the AA makes more sense, but will penalise people on middle incomes,” he said.
However, McPhail said: “The only viable option is to bring the AA down to £40,000 per year.
“It may impact on people in final salary schemes, such as doctors and other public sector workers, but the move for public sector workers to career average schemes will smooth out most large yearly accruals.”
McPhail said public sector workers could react angrily to additional burdens as they face salary cuts, increased pension contributions and redundancy.
However, he said the changes would provide advice opportunities for IFAs.
“We will have to explain to public servants how this will work,” said McPhail.
George Bull, senior tax partner at Baker Tilly, said some clients may even need help from advisers to avoid being tarred as tax cheats.
“The last time the limit was reduced, people who had previously paid greater amounts were branded by statute as tax avoiders and subject to a potentially penal tax regime,” he said.
Tax relief since 2006Pre-2006: The AA was 17.5% of salary for people under 35, rising to 40% for those aged over 61. |
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| Comment | Budget 2012: Pensions tax relief in the spotlight |
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Slice
I think there has been a little wording error in the article, it does not cost the goverment when tax free cash is paid out.. its not like they're dipping into their pockets they just don't get a slice.. or are we meant to be grateful?
Posted by: anon
Why is the issue being confused
Tax relief on pension contributions, is deferred taxation, until the pension goes into payment. Therefore if the Treasury decide to change the rules they (have to?) change both sets. Tax relief is not a free meal ticket regardless of what the media claims
Posted by: M J Winfield
Why is the issue being confused
Tax relief on pension contributions, is deferred taxation, until the pension goes into payment. Therefore if the Treasury decide to change the rules they (have to?) change both sets. Tax relief is not a free meal ticket regardless of what the media claims
Posted by: M J Winfield
Missing the point... AGAIN!
It's a bit like "robbing Peter to pay Paul" - more fiddling with the pensions system is only going to deter savers from utilising pensions in their retirement planning at a time when the industry is still bruised from constant tinkering. The idea the government will be able to provide adequate pensions for all in the future is naive. The only solution is to reduce dependency on State Pensions and increase private provision.How many independent reports do we need to confirm this and yet still spectacularly miss the point? MJ Winfield (above) is absolutely right that the tax is deferred anyway, to meddle again and effectively reduce the attractiveness of pensions (for any area of the working public) is shortsighted and misguided. What we need now is a period of stability and time for trust to be rebuilt in effective retirement planning using pensions not another "raid."
Posted by: Jamie Taylor
Missing the point... AGAIN!
It's a bit like "robbing Peter to pay Paul" - more fiddling with the pensions system is only going to deter savers from utilising pensions in their retirement planning at a time when the industry is still bruised from constant tinkering. The idea the government will be able to provide adequate pensions for all in the future is naive. The only solution is to reduce dependency on State Pensions and increase private provision.How many independent reports do we need to confirm this and yet still spectacularly miss the point? MJ Winfield (above) is absolutely right that the tax is deferred anyway, to meddle again and effectively reduce the attractiveness of pensions (for any area of the working public) is shortsighted and misguided. What we need now is a period of stability and time for trust to be rebuilt in effective retirement planning using pensions not another "raid."
Posted by: Jamie Taylor
Fight for Tax Free Lump Sum !
Apart from being very unfair surely it must be unlawful to tax a lump sum on accrued benefit. I am due to retire on the 2nd April 2012 having contributed for 40 years under the conditions of a tax free lump sum. Being in the middle salary bracket I do not consider myself well off. How can this, if implemented encourage young people to save for retirement. The government are just looking to get money from the easy targets. Time to fight back !!
Posted by: Robert Carr
Leave tax relief alone
The cost to the Treasury will fall in future years. Those who have used carry forward to the max will not be able to repeat the exercise for another 3 years, and not at all if they fund to the annual allowance. The reduced annual allowance will take effect in future years. Re M J Winfield's post - this is only true for people who retire in UK. Those who go abroad do not pay UK tax on pension. It's about time there was a departure tax for those who take their UK pension overseas - for too long they gain from the tax breaks on saving into a pension in the UK and the Treasury lose out when they retire overseas.
Posted by: Fraser Grant
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Why not
Oh go on then - they're killing everything else off -so they may as well put the final nail in the pension coffin!
Posted by: Nick Thompson