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High earners pile into pensions amid tax relief overhaul fears


Higher and top-rate taxpayers are dramatically ramping up pension contributions as the Treasury considers a radical overhaul of the tax system.

An analysis of contributions by Hargreaves Lansdown clients shows that customers are putting 61 per cent more aside following the summer Budget, when Chancellor George Osborne announced a consultation on overhauling how pensions are taxed.

Contributions from higher and top-rate taxpayers are also up 120 per cent for the tax year, according to Hargreaves’ figures.

One reform option under consideration would see the tax relief system flipped so contributions, rather than withdrawals, are taxed. Policymakers could also opt to introduce a flat rate of tax relief, rather than giving savers relief at their marginal rate.

The consultation on tax relief reform is due to close on 30 September.

Hargreaves Lansdown head of pensions research Tom McPhail says: “The game is up for higher rate tax relief; higher earners may feel that’s unfair but the Chancellor needs to balance the books and where else is he going to go but to the people who have the most money.

“Savvy investors are making the most of these earnings related top-ups while they still can.”

McPhail says he anticipates the Treasury will opt for the flat rate tax relief option, describing the likelihood of the exiting upfront tax incentive being removed as “remote”.

He adds: “Once you start exploring the transitional complexity, it is clear that the Pension Isa concept is dead in the water. It would be horribly unpleasant to deal with.”



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. From our experience it’s more to do with the changes already announced! There are many who are going to be impacted by either the reduction in the LTA to £1Million form next April, the reduction in the Annual Allowance to £10k for additional rate taxpayers, or both; so they are maximising contribution in the current tax year as they will not be able to contribute any more from next April.

  2. When this lot are restricted just watch the decline in contributions. The providers fondly believe that AE will make this up – prepare to be disappointed.

  3. Have to agree with you Harry. Remember when Gordon decided it would be a good wheeze to tax the funds to fill a £6b hole in the budget.
    Difference was that even ‘respected commentators’ back then thought it was ‘oh so clever’, because nobody would notice. I’m so sorry to have been proven right when I said at the time that pensions would be decimated. How many Final Salary / DB schemes are still open?

    Tax does make a difference! The concept of deferring some current income and putting it away before it is taxed but then having to pay tax on the income it subsequently provides is reasonable and has motivated people to invest for decades. Eventually the Treasury does get the tax anyway.
    Successive Govts. have managed to get away with frankly very poor state pension provision because there were always large numbers of employees in DB schemes. This is no longer the case and continuously messing about with long tern schemes will mean that private provision will decline.
    Sorry a much larger topic than we have the time and room for here.

    • Not sure GB’s very small tax on pension funds (in percentage terms) has had the effect on DB schemes you think, rather mortality assumption changes and lower bond/gilt rates have a much greater impact.

  4. John Hutton-Attenborough 24th September 2015 at 9:30 am

    FRS17 was also a game changer for final salary schemes and valuing assets and liabilities. Together with GB’s wheeze and market fragility in 2000 onwards the employer “open cheque book” responsibility in the private sector became the death knell.

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