Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
News reports this weekend suggested the Government is considering increasing tax on pension saving as a way to help pay for extra spending in the pandemic.
In unattributed remarks reported in the Telegraph, a Government source suggested cuts to the total you can save inside a pension and to the tax relief on contributions are being considered as part of changes to be announced later this year. A new tax on employer contributions to pensions was another possible change, the reports said.
If all this sounds familiar, it’s because these rumours have surfaced time and again for years. The pattern is now well-rehearsed. A government under pressure to balance the books floats the idea of raising tax on pensions ahead of a Budget, only for those ideas to be dismissed as being too politically costly to proceed with.
There’s currently no reason to think this time will be any different - and a new round of briefing today claimed the plans are not yet being ‘actively’ considered - but it is noteworthy that ministers, once again, see retirement savings as potentially fair game.
At the moment, pension tax relief means the contributions you make are helped by money that would otherwise have gone to the tax man. A boost equivalent to any basic-rate tax paid is automatic, while the extra available to higher and additional rate payers is either added automatically or else claimed through a self-assessment tax return. Contributions are allowed to build tax-free and then 25% of the pot can be taken with no tax due and income tax payable on the rest.
A good way to look at it is that it costs a basic-rate payer £80 to make a £100 pension contribution under the current rules, while a higher-rate taxpayer pays just £60 for the same effect and an additional-rate taxpayer £55.
From a tax point of view, all this makes a pension potentially the most advantageous place to save and invest your money. The biggest relative benefit comes for those whose income in retirement puts them in a lower tax band than was the case during their working life and, because the system is linked to the income tax you pay, it is more generous overall to higher earners.
That could make it an attractive target for a Chancellor looking to raise money after the huge increase in spending needed to nurse the economy through the pandemic, and it has the added appeal that the people benefiting the most currently are rich by most standards so any windfall for the Treasury could be refocused to help younger people and lower earners.
Likewise, a cut to the Lifetime Allowance for pensions could also be framed as a raid on the rich to help balance the books. But is that characterisation fair? At the moment, a total of £1,073,100 may be saved inside pensions with tax relief applying. The weekend reporting suggested a cut to £900,000 or £800,000 could be applied. Those may seem like big numbers but bear in mind that, based on a commonly quoted guideline for sustainable pension withdrawals of 4% a year, an £800,000 pot would yield an annual income of £32,000 in retirement.
Any of the changes being discussed would face opposition from voters who the Government still wants to keep onside, so it appears very uncertain that any will see the light of day. Yet it still makes sense for higher-rate tax payers to review their pension contributions to ensure they make the most of the system as it stands.
Those saving into a workplace scheme should ensure they are maximising any matched pension contributions from their employer. This may require contributing more than the default minimum into their scheme. If you have maximised the help on offer for a work scheme, a SIPP can allow you to take further advantage of the tax breaks on pension saving.
Bear in mind that tax relief on contributions to a pension are restricted by the amount you earn and the Annual Allowance (currently £40,000 for most people) for pension saving. Very high earners may also be subject to an even lower limit via the Tapered Annual Allowance. Anyone who has taken taxable income from their pension may also be subject to a lower limit under the Money Purchase Annual Allowance.
More on getting ready for retirement
Important Information: Withdrawals from a pension product will not normally be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information and our guidance tools are not a personal recommendation for any particular investment. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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