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Danby Bloch: Pre-election planning on pensions

Advisers should be planning now for the possibility of a change of government

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A change of government come May is clearly not a certainty but it is a big enough risk and advisers should be thinking ahead while there is still time to take some sensible action. The main area for anxiety has to be pensions.

The most likely items on a Labour agenda are a reduction to the lifetime allowance and a 20 per cent cap on tax relief for people earning at least £150,000 a year.

The central case for taking the idea of cutting tax reliefs on pensions for the relatively well off seriously is that they cost a great deal of money.

The combined total income and corporation tax costs for pension tax reliefs in 2012/13 was £34.8bn and the cost of national insurance contribution relief on employer contributions was £15.2bn according to the Office for National Statistics. So it is a juicy target for pretty much any government – as we have seen from George Osborne’s depredations over the years.

Ed Balls suggested the lifetime allowance should be reduced from the current £1.25m to just £1m. And in his Spring Budget, George Osborne shot Balls’ fox and unexpectedly announced the reduction himself – effective from April 2016. So what should advisers be doing now?

Boost contributions or not?

The clients most affected will be those who have total pension funds worth about £1m and who have the opportunity to top them up. The aim will be to get nearer to £1.25m before April 2016. That is just over a year for pension planning contributions.

But advisers should be careful about advising relatively young clients who already have quite high pension pots to contribute lots more now. For example, there are some clients who are now in their 40s with pension funds well below £1m. Some could be in danger of exceeding the £1m possible lifetime allowance figure before they reach the minimum pension retirement age of 55 – they might even exceed the current £1.25m allowance.

For example, someone now aged 40 with a fund of £450,000 would only need annual growth of 5 per cent to exceed £1m by age 57 without making any more contributions. Of course, Osborne’s proposal to index the lifetime allowance in line with CPI from April 2018 will help. Making further contributions or achieving higher growth would mean this 40 year-old being in danger of exceeding the current £1.25m level.

Such trapped people may be forced to choose between paying the extra tax on the benefits and trying to cap the growth on their pension. Stifling the growth would be a bit pointless, as the money would be worthwhile having even after 55 per cent tax on the excess over the lifetime allowance. But there would not be much point in contributing more now.

So, while some should be considering adding to their pension, others should not.

The tax challenge

Another toy in the Labour pensions toy cupboard is the proposal to limit pension contribution tax relief to 20 per cent for people earning over £150,000, that is, paying 45 per cent tax. The devil will be in the detail and it is the detail we are lacking at the moment. It sounds like a call for some clients who currently get 45 per cent tax relief on pension contributions to make contributions this year and probably next year before the election (or at least before the first post-election budget).

Of course, they would need to take into account the lifetime allowance point that already limits the attraction of making further pension contributions for some clients on track to exceed the proposed reduced lifetime allowance.

There is of course the other possibility that the rate of tax relief on pension contributions generally could be brought down. This is a popular idea appealing to commentators on both the right and the left of the political divide. Labour has not promoted it recently but one could see it would appeal to egalitarian instincts. Steve Webb, Lib Dem pensions minister extraordinaire, has been pushing the idea of a flat rate 33 per cent tax relief for all. It has also got its supporters on the right. I would not be astonished to see it in a Conservative Budget. So, there is another reason for higher rate and additional taxpayers to make a pension contribution sooner rather than later.

What are the chances of a different government curtailing the new pensions freedoms? There have been paternalistic mutterings but the very salient popularity of the measures is probably enough to save them for the time being.

The threat to the tax-free status of the PCLS has been with us many years and was mentioned by Balls last year. However, with the advent of pensions freedoms, it seems to be a rather less likely move. It is hard to think of a more reliable way to irritate vast cohorts of the grey vote.

Danby Bloch is chairman of Helm Godfrey, independent financial planning and employee benefits advisers

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  1. Didn’t George Osborne mention that the lifetime allowance will be going up towards the end of the next 5 years, then indexed. So this needs to be kept in mind as well. It seems more people will apply for protection.

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