There’s always fretting ahead of the Budget that the Chancellor may be about to make the savings system less generous, and this year is no exception.
There is mounting speculation that, when he addresses the House of Commons on October 29, Philip Hammond will take aim at tax relief on pension saving as a way to pay for the extra funding for the health service, local government or anything else he’s under pressure to give more money to.
Such rumours are nothing new and resurface every-time a Budget comes round. Is there any more reason to think the latest ones will prove true when previous ones have not?
Messaging from the Treasury has been cryptic but the Chancellor’s speech to the Conservative Conference included the line: “If we want a well-funded NHS fit for the future we will have to find a little more tax to fund it in the future. I shall say more at the time of the Budget.”
The most dramatic move he could make would be to alter the tax relief available on pension contributions. But short of that are many limits, thresholds and allowances that can be tweaked to make the system less generous but in a less explosive way. Indeed, the system has already been getting less generous in these ways for years.
At the moment, pension tax relief means that contributions 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, 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.
The Government has previously consulted on whether the system of tax relief is working properly - but has rejected the change as too disruptive. It would mean a major overhaul of the system and constitute a surprise if it transpires in the Budget.
Perhaps more likely are smaller changes to lesser-known rules. One such reform could be to make the ‘Annual Allowance’ for pensions less generous. Currently, we can each save a maximum £40,000 into a pension each tax year. This level is a dramatic reduction on previous limits. It was once as high as £255,000 but has been slashed, first to £50,000 and then its current level.
Could it fall further? At £40,000, it’s only likely to be high earners who are affected by it and therefore may be deemed a politically acceptable cut to make.
If that does happen, it may not be the headline figure that is cut, but rather the inner workings of something called the ‘Annual Allowance Taper’. This is a mechanism that potentially reduces the allowance from £40,000 to just £10,000 for those with qualifying earnings above £150,000.
The reduction is ‘tapered’ so that the Annual Allowance falls gradually as your level of income rises. There are complex rules governing who is affected, and by how much - and you can find a more detailed explanation here.
There is always likely to be speculation about the tax system and the rules can - and do - change at short notice. Making the most of the help from the tax man whenever you can is crucial - you never know when it might be taken away.
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. The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944. Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Combining your pensions into a Self-Invested Personal Pension (SIPP) can make it easier to manage your savings - and it could be cheaper, with lower fees than you’re currently paying.