In advance of last week’s Autumn Statement, there was a lot of speculation about Government plans to restrict the tax relief on pensions contributions. Most predictions were for a reduction to the annual allowance from the current limit of £50,000 to £40,000 or even £30,000.
There were also some predictions that the Chancellor would reduce the lifetime allowance from the current rate of £1.8m.
In the current economic climate, it was hardly a surprise that the Government chose to cut the pensions tax relief annual allowance to £40,000, and the lifetime allowance to £1.25m. Many people would say this is fair, and although the NAPF is right to point out that it will affect some people on relatively modest incomes in final salary schemes, the Government has said it will provide some protection against retrospective tax charges and is not introducing the change until 2014, giving time to plan.
However, we are disappointed that the Chancellor has not used this as an opportunity to take a broader look at how to reward people for saving in a pension.
Age UK has called for fairer tax incentives to encourage people on modest incomes to save for a pension. Many people are simply not aware that pension contributions qualify for tax relief. The DWP’s recently-published research, Attitudes to pensions 2012, shows that only 46 per cent of respondents knew that money paid into a private pension qualifies for tax relief – and this percentage has actually fallen since 2006 when 53 per cent got the question right.
In addition, there are other issues for people with small pension pots which often come as an unpleasant shock to smaller savers.
For example, the trivial commutation limit remains at £18,000 and the tax-free cash lump sum is 25 per cent of the lifetime allowance, however much or little is saved. While this may appear logical, the effect is that someone with a trivial commutation lump sum will get only £4,500 tax-free, while someone with the (new) maximum of £1.25 million could get a tax-free allowance of £312,500. The current rules also create some real complexities for small pension savers, for example in order to qualify for trivial commutation all pension savings must be drawn within a twelve-month period.
People on low incomes need some reward for tying up their savings until retirement, and tax relief also provides a cushion against ups and downs in investment performance. However, in the context of auto-enrolment, it is time for a broader look at pensions tax relief, and whether there is a better way of using the money to encourage pension saving.
Jane Vass is head of public policy at Age UK