Easing the burden
Will the government rebalance pension tax benefits in favour of Britain’s lower earners?
Despite the benefits offered by pensions, the general population is still failing to make adequate provision for retirement, while critics claim that tax privileges are unfairly weighted in favour of high earners. It’s no secret that the government needs to encourage everybody – especially younger generations – to engage with the idea of saving for retirement. Unfortunately, the tax breaks that come with pensions are not always well understood, and those in their 20s and 30s don’t always feel incentivised to put away more than the bare minimum.
The launch of the new Lifetime ISA (LISA), scheduled for April, is intended to help address the challenges facing the under-40s by allowing them to save for retirement, or a first home, and benefit from a more explicit government bonus. But the LISA could also be a signal that the government sees the direction of travel for retirement as ISA-centric – and pensions as too expensive. The 25% bonus under the LISA is far less generous than pension tax relief for higher earners, who can claim relief at 40% or 45% on their contributions.
In November 2016, the Treasury said that tax relief on pension savings is among the “most expensive” of reliefs, costing £48 billion in 2014/15. It added that “around two-thirds of the tax relief [goes] to higher and additional rate taxpayers” and that “it is important that resources focus where there is most need”.
Furthermore, Theresa May has said she intends to focus her attention on those “just about managing”. Curbing tax breaks for high earners could therefore be seen as expedient in the bid to attract centre-ground support and trim billions from the deficit.
The first we will hear of any reform will probably be in the Budget on 8 March, so predicting change at this stage is pure speculation. However, given that higher rate pension tax relief remains an enormous burden for the government to shoulder, an immediate overhaul remains a possibility. Thus, many investors will want to consider what action to take. Ian Price, divisional director at St. James’s Place, recommends that people look at their options with their financial adviser, but believes that tax privileges for higher earners are very unlikely to become more attractive.
“If you’re a higher rate taxpayer, with cash not earmarked for other purposes and you haven’t used all your pension allowances, it would make sense to bring forward pension contributions to before the Budget in March,” says Price. “It makes little sense in holding off. You are very unlikely to be in a worse position if you contribute today.”
Going to waste?
For higher earners, it could also make sense to make the most of the three-year rule on ‘carry forward’; this is a valuable tax-planning tool that allows investors to make large pension contributions without incurring a punitive tax charge for exceeding their annual pension allowance.
If you have used up all of your 2016/17 pension allowance, you can use any unused allowance from 2013/14, 2014/15 or 2015/16 and still benefit from tax relief at your highest marginal rate, with anything over the basic rate being reclaimed via the annual tax return. Individuals should be aware that any remaining allowance from the 2013/14 tax year will be lost after 5 April 2017.
The final months of the tax year are a time to review tax-planning opportunities and to make sure annual tax exemptions, allowances and reliefs are not lost. However, with a Budget looming, it could make sense to top up your pension sooner rather than later.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.