Pension tax relief

Calls to reform tax relief on pension contributions are coming from across the political spectrum.

You could be forgiven for thinking that the radical changes to pensions announced in the Budget should have put an end to calls for further reform of pension taxation.  No suck luck.  The pension environment tends to be in constant flux and last month saw two ideas to create some more.

Steve Webb, the Pensions Minister, stepping out of his ministerial persona, proposed that tax relief on pension contributions should be at a flat rate of 30%, regardless of the contributor’s personal tax rate.  At the same time he suggested the abolition of the lifetime allowance (LTA), which effectively sets the maximum tax-efficient value of your pension benefits.  The LTA has just been reduced from £1.5m to £1.25m and Mr Webb’s party, the Liberal Democrats, has a further cut to £1m in its 2015 election manifesto.

The idea of a flat rate relief for pension contributions is nothing new.  Last year the Pensions Policy Institute (PPI) proposed the same idea, arguing that at 30%, the overall cost would be the same to the Exchequer and that it would encourage more basic rate taxpayers to save via pensions.  The PPI argued that under the current regime low earners pay around 50% of pension contributions but receive just 30% of all tax relief given.

A more radical proposal has re-emerged from the Centre for Policy Studies (CPS), a think tank closely linked to the Conservatives.  In a newly published report, it suggests that tax relief on pension contributions should be replaced with a Treasury payment of 50p for £1 saved (33 ⅓% effective relief) on pension contributions of up to £8,000 a year.  It also suggests combining pensions and ISAs, with a total annual savings limit of £30,000.

None of these re-workings of tax relief may come to pass, but as the author of the CPS report, Michael Johnson, pointed out in a blog “For a cost savings-hungry Chancellor, pensions tax relief is now the lowest-hanging, juiciest fruit in Whitehall.”

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

9th May 2014