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MM leader: Pension tax relief is boiling over

Natalie Holt Peach 250x255

Pensions have never been more attractive. The coalition Government has done a good job in doing away with the idea that pensions are something to be kept under lock and key for the longest possible period, before converting them to a typically paltry income. Now pension freedoms are upon us, savers are free to do what they want with their money, a stance very difficult to challenge politically.

On top of that, the new “death tax” reforms are now in force, with unused pension pots left by those who die aged under 75 tax-free. The same goes for joint-life annuities.

All of the above means engagement with pensions is likely to be higher than it has been for years. In the first weeks of pension freedoms, anecdotally advisers are reporting that rather than cash in their pension pot completely, investors are piling into pensions like never before.

But we could be reaching a tipping point on bigger and better contributions, and that is down to the same group of people that whipped up interest in pensions saving in the first place – politicians.

The issue of reforming pensions tax relief has been bubbling away for years. But now the Tories have announced their headline grabbing inheritance tax move, pensions tax relief is most definitely boiling over.

Of course, as the campaign for Number 10 gathers pace, candidates only have to open their mouth to wax lyrical about their latest policy for journalists and rivals to jump down their throat about how these fanciful ideas will be paid for.

So the Conservatives have come prepared, saying the increased £1m IHT threshold would be funded by reducing the annual allowance for higher earners.

And the Tories aren’t the only ones at it, as Labour and the Liberal Democrats have also signalled plans to overhaul tax relief.

As election pledges are fleshed out, it could be that the noise around tax relief is actually pushing savers to contribute more to their pension while they still can.

Policy wonks may be looking to dissuade the public of the notion that the hallowed “grey vote” is protected in the run-up to the election. They will bang the drum about looking after “hard working families”, but don’t diligent savers also count as hard working?

The question policy teams should be answering is: do we want to encourage pension saving or not?

Natalie Holt is editor of Money Marketing – follow her on Twitter here



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

  1. Natalie, speaking from the sharp end, the majority of workers in the UK, who need pensions to provide more than the flat rate pension from the state, are not even higher rate taxpayers. To get tax relief @ 45% for those earning over £150,000 is fairly obscene, they have ISA allowances they can use as well as save for retirement outside pensions. But hey, these are the city workers with big salaries and bonuses that would be in a DC scheme.
    The biggest effect would be on those NHS managers, the FCA higher ups, the Local Authority managers and Police higher command who would be most affected if they are earning over 150k. And I am not particularly worried about them either.
    The recent rise in popularity of pensions to the mass of workers comes from the access changes. A lot of clients paying into pensions did not even realize that got tax relief at marginal rate on their pension contributions, as they started moaning about tax upon drawing down. This lack of understanding about paying into pensions. the fault of successive governments not ensuring tax relief if shown on payslips every month.

  2. ProV you are incorrect it will have less effect on those in public sector pension schemes.

    The rather simplistic way that benefits are capitalised means that they can build up more benefits in a their scheme than someone in a DC scheme. On a like for like basis someone in a DB scheme could retire on a pension of £50k pa without breaching the LTA of £1 million whilst someone in a DC scheme could probably only purchase a pension of around £25k pa from a pot of £1 million.

    What politicians fail to point out when bleating on about the tax relief claimed by high earners is how much the tax payer subsidises public sector pension schemes.

  3. The ‘tax relief’ arguement will no doubt rage on BUT let’s not forget that the relief is effectively deferring tax…. working particularly well where people move down tax brackets in later life.

    If relief tips the other way, the danger is that higher rate tax payers will choose not to fund for their retirement as they are ‘better off’ paying tax now – e.g. why invest in a restrictive environment to achieve 30% tax relief now if the income will be taxed at 40% later – which therefore begs the question does the Gvt still want a pension to be seen as an inducement to provide for retirement or not?

  4. Paul Stocks – absolutely right. There are better ways to ensure that tax relief for those who do not really need it can be compensated for in other ways.

  5. I also wonder how much of the “tax loss” relates to those with no earnings contributing £3,600 into a personal pension?

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