News that pension contributions hit record levels last year is fueling fears that the Chancellor may seek to restrict pension tax relief in his Autumn Budget.
A total of nine million people contributed £24.3 billion into personal pensions in 2015/16 according to HMRC data– a record figure.
This exceeds the £20.9 billion that was invested in pensions in 2007/08, prior to the financial crisis.
But a reinvigorated pensions market means rising costs for the Treasury. The net amount it spends on pension tax relief is £24.8 billion, a significant increase on the £21.8 billion bill prior to the financial crash. This net figure takes into account tax taken from pensions in payment.
This figure reflects the success of the auto-enrolment programme, a key part of the Government’s saving strategy. Companies setting up group personal pension schemes are included within the figures.
This had led to far greater numbers of people contributing to pension schemes. However, due to the relatively low contribution levels the average annual contribution per individual has fallen, from a peak of £3,690 in 2011/12 to £2,690 in 2015/16.
AJ Bell senior analyst Tom Selby says: “There has already been speculation that Philip Hammond will take the axe to pension tax relief in his first post-election Budget, and numbers such as these will inevitably add fuel to the fire. But it is vital that the embryonic savings culture being nurtured in the UK is not wrecked by a Treasury desperate to raise cash ahead of Brexit.”
In the past, speculation that tax relief may be restricted – particularly for higher rate taxpayers – has resulted in an increase in pension contributions ahead of the Budget.
Although previous chancellors have retained pension tax relief at 40 per for higher earners, they have sought to limit Treasury costs by restricting both annual and lifetime limits.
Selby adds: “It’s important to put the rising cost of pension tax relief in context. While a net annual bill of almost £25 billion is a scary number, the key is that average savings levels per person remain way down on previous peaks.”
He says any attempt to restrict tax relief may result in the average amount people save falling further.
“Pensions have suffered from years of chopping and changing of tax incentives. We have reached a point in time where the political sting needs to be taken out of the pension tax debate through the establishment of an independent commission.
“Such a commission could propose reforms based on the long-term interests of savers and in the process rid us of some of the horrific unnecessary complexity that exists in the current system.”