The most concerning part of Chancellor Philip Hammond’s Autumn Statement was not in his speech, or even in the Green Book setting out the details of the main proposals. It was tucked away in a consultative document about cutting the amount of the pension money purchase annual allowance.
The following passage from that document has been interpreted as a threat to higher and additional rate tax relief on pension contributions. National Insurance contribution relief may be in the firing line as well.
It reads: “The cost of tax and National Insurance contributions relief on pension savings is one of the most expensive sets of relief offered by the government. In 2014 to 2015 this cost around £48bn, with around two thirds of the tax relief going to higher and additional rate taxpayers.
“As more people become pension savers for the first time and as automatic enrolment contribution rates increase, the cost of income tax and National Insurance contributions relief will increase. The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”
On that basis, we might well see a move in one of the 2017 Budgets (next year will see the last of the spring Budgets and the first of the new autumnal Budgets).
The Treasury has denied this means the Chancellor is proposing to abolish these expensive reliefs. But the facts speak for themselves: there is a yawning fiscal gap that could get much worse, and pension tax relief could provide a major source of saving.
So we have been given fair warning. Any client that can get higher or additional rate tax relief on contributions this year – and possibly next as well – should make investing in their pension a very high priority. These halcyon days for tax relief will not return. Obviously, it is important to bear in mind the possible impact of the annual allowance and the lifetime allowance.
Cutting the MPAA
And what of the MPAA? The Government is contemplating cutting it from £10,000 to £4,000, with effect from 6 April. The MPAA applies to people who have drawn any income benefits under the current flexible pension rules; either flexi-access drawdown or uncrystallised funds pension lump sum. The purpose of the MPAA is to limit pension income from being recycled as fresh tax-relieved contributions.
As the consultative document says on this particular point: “The Government does not consider earners aged 55+ should be able to enjoy double pension tax relief, i.e. relief on recycled pension savings.”
There is just a glimmer of hope from the document that there could be some exceptions for people who would be unfairly hit by the proposal to cut the MPAA to £4,000. For example, various commentators have suggested the reduction could unfairly impact people trying to retire gradually, not playing fast and loose with recycling games to get extra amounts of tax relief.
One envisages a situation whereby a person has started to draw some of their pension income, then discovers they need or want to start work again but can then save very little to build up extra pension.
With this in mind, clients that have started to draw on their pension income and are therefore subject to the MPAA should consider investing the full £10,000 allowance before the end of the tax year.
Clients that are thinking about how they should draw their pension should consider the implications of taking any of it in the form of income. This is especially the case if there is even a possibility they might want to return to work and make larger pension contributions than £4,000 a year.
If such clients need to draw on their pension, it often makes more sense to take the pension commencement lump sum first – possibly by regular withdrawals – and not touch the taxable income until last. Of course, that is only possible with flexi-access drawdown. The more inflexible UFPLS requires every withdrawal to be 25 per cent PCLS and 75 per cent income, placing them straight into MPAA territory.
There was some good news on the salary sacrifice front, with the Government going ahead with the proposal to remove the tax and NIC advantages of salary sacrifice schemes from April, following the consultation by HM Revenue & Customs in the summer.
Hammond confirmed certain salary sacrifice arrangements would not be hit. There will be exemptions for pensions, some pensions advice, cycle to work schemes and the provision of ultra-low emission cars.
It does not currently look as if relevant life policies will be exempt, so these will need to be handled with some care if an employee sacrifices salary to have such life cover.
There will be some time to get used to the new rules, however. First of all, any arrangements in place before 6 April will be protected for the full tax year until 5 April 2018.
What is more, arrangements for cars, accommodation and school fees will be protected until April 2021. So encourage employers and employees to consider using salary sacrifice while it is still possible.
Danby Bloch is chairman at Helm Godfrey