The government has avoided big Pension Tax reforms up until now but can it continue to avoid making cuts for much longer?
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In a speech made by David Gauke, the new secretary of state for work and pensions, to the ABI conference last month, he announced that the government has no appetite for any major pension tax reforms. Which, on the surface, is good news for the more wealthy savers and investors. But who will affect?
Most feel that this is temporary and that the government is preparing to cut back on allowances and benefits on retirement savings for the wealthiest savers in a bid to raise more money for the Treasury.
Why are Pension Tax reforms needed?
As it stands now, the Pension tax system is perceived as inefficient and unfair, giving large sums of tax relief on relatively small groups of people – those still on final salary schemes and the higher rate tax payers.
The system is also thought to be over complicated with few understanding the full benefits thus not providing the incentive to save.
What changes are being considered?
The Lifetime Allowance, the point at which you start paying tax on your pension pot, has already been reduced from £1.8m to £1.25m in 2015, saving the government around £500m a year. It was reduced again to £1m in 2016 – and some think it could go lower still. However, this affect an increasing number of people.
Other allowances could be reduced such as the annual allowance. This has already been reduced firstly from £255, 000 to £50,000, then again down to £40,000.
But the biggest win for the government could be looking at Final Salary schemes, or defined benefit pensions. People on these schemes benefit from much higher tax efficiencies, than those on defined contribution plans.
As a final salary pension is measured against the LTA on a 20:1 basis, you can have a guaranteed retirement income of up to £50,000 a year, inflation linked and you would not breach the LTA of £1m – thus no additional tax payments.
But comparing that to defined contribution schemes, based on current annuity rates, a £1m fund in a defined contribution pot would only buy you a guaranteed income of around £28,000 a year, almost half the value.
So to equal the balance and create a fairer system, the government could change the final salary scheme multiplier from 20:1 to 30:1 meaning that if you had a £50,000 a year final salary pension, this would give a retirement fund worth a £1.5m – £500,000 over the LTA resulting in additional taxation of 55%, giving £275,000 back to the treasury.
Will you be affected by these changes?
At present these reforms are just speculation on how the government could address the current imbalance and create more returns for the Treasury.
As fully qualified pension advisors, at Prosperity IFA, we will keep you updated with any changes as and when they happen.
We are always happy to review your current pension arrangements. If you would like to explore what the best move would be for you or want understand the options available, talk to one of our expert Pension Advisors on 01892 300303. For more information on how we can help you, go to our website www.prosperityifa.com.