The Telegraph reports that the Government plans to change tax relief on pensions.
We look at how this change could be damaging to the UK economy. In a nutshell, these plans will mean less economic activity. Hopefully they persuade many people to stop saving for their old age.
The Government plans to extend the freeze on the pensions lifetime allowance for another two years until 2028. In Spring 2021, it was frozen by the then Chancellor, Rishi Sunak, at £1,073,100.
The lifetime allowance may seem high, but its real value in 2029, taking into account inflation, will be less than half a million pounds.
Any amounts over the lifetime allowance limit is taxed at 55% - 10% higher than the highest rate of income tax.
So, if your pension fund grows too much, a large chunk of it will be taken away in tax – effectively a direct penalty imposed on prudent savers.
The Government also plans to reduce the amount of tax relief granted each year to encourage pension saving. As is often rumoured, restricting tax relief to a basic rate only would save millions for the Exchequer. A higher-rate taxpayer making £10,000 a year in gross pension contributions currently receives 40% tax relief, so the net cost is £6,000. If relief is restricted to the basic rate the net cost is £8,000.
These changes will strongly encourage people – particularly successful and productive professionals – to retire earlier.
In the wake of the pandemic, 250,000 people in their 50s and 60s have retired early. This is a significant blow to the economy.
The negative impact will be even more significant in the public sector, where there is less flexibility over pay and benefits.
Former Pensions Minister Baroness Altman calls the Government plans "the economics of the madhouse."
Looked at holistically, pension tax relief doesn't cost the Government anything-it just allows people to keep more of their own money, encouraging people to make provisions for their old age rather than rely on state benefits or subsidies.
Pensions are an essential planning tool both for retirement and overall Inheritance Tax planning. In cases where the lifetime allowance is likely to be breached, there are essential steps that can be taken to prevent punitive tax charges. In addition, there are alternative pension provisions that can be made. We are happy to work alongside your existing financial advisers to plan your financial affairs tax efficiently.
Please get in touch if you or your clients have any queries regarding pension schemes or other retirement benefit schemes.
