Despite pressure on the Government to save money wherever it can to address the budget deficit, the Treasury has decided to let pension tax relief continue at the saver’s marginal rate.
ABI acting director general Maggie Craig says this will help keep pensions as an important form of saving for higher earners and as a result should keep pensions accessible to many people in the workforce.
She says: “It is right that this plan keeps the important principle of pension tax relief at the marginal rate of tax paid. This will help keep those senior decisionmakers responsible for staff pension schemes engaged and supportive of pension saving.”
But perhaps most welcome of all is the decision to scrap the extremely complic-ated system of tiers and sliding scales for reducing pension tax relief that the Labour government had planned to introduce from next April.
Friends Provident CEO Trevor Matthews says: “Replacing the previous Government’s complex proposals with an elegant solution that achieves the same revenue objective is to be applauded. It is a welcome first step that begins to remove the uncertainty that has been lingering over pension planning in the UK for some time.”
Standard Life senior pensions policy manager Andrew Tully says: “An annual allow-ance works in the same way as Isa limits so it is simple, clear and easy for people to understand. The allowance of £50,000 allows the vast majority of people to save as much as they want when they want. This change means that pensions will continue to be an attractive home for longterm savings, retaining the unique advantage of an upfront tax incentive from the Government.”
In return for a more generous annual allowance, the lifetime allowance has seen a substantial reduction from £1.8m to £1.5m and this reduction could impact on many high-net-worth clients.
Aegon pensions development manager Kate Smith says: “We fully recognise that the reduced annual allowance of £50,000 has come at a cost and this is the reduction in the lifetime allowance. This will be disappointing for the highest earners and they should speak to their financial advisers to understand their situation.”
The cuts to both the annual and lifetime allowance should offer opportunities for advisers with high-net-worth clients who may be impacted by the changes.
Legal & General pensions strategy director Adrian Boulding says: “The new allow-ance means that high earners may need to consider useful additions such as Isas and maximum investment plans for retirement planning rather than paying the full rate of tax on contributions above the annual allowance.
“Isas can provide a tax-free investment although there is a limit to how much you can save each tax year, which is set to rise to £10,680 in 2011.
“Maximum investment plans allow you to save much larger amounts over a 10-year minimum investment in the form of a regular savings life insurance plan. You only pay tax at around the basic rate on your investment growth, paid by the life insurance company, so when you come to cash it in, there is no further tax liability. For a higher-rate taxpayer, a Mip could prove to be an extremely tax-efficient addition to their retirement plans.”
The Treasury announcement also inclu-ded plans for any unused annual allowance to be carried forward for up to three years. This measure should allow anyone approaching retirement to make big, one-off contributions to bolster their retirement savings and should present significant opportunities for advice.
Craig says: “The ability to roll over any unused allowance over three years is sensible and will retain much needed flexibility in pension planning, especially for those nearing retirement.”
But while the industry seems to be content with the outcome of the review, the impact of inflation remains a concern, particularly for the new, lower lifetime allowance.
Craig says the ABI will continue to engage with the Treasury to lobby for the new ann-ual and lifetime allowances to be kept in proportion to earnings so future pension savers do not lose out.
Matthews says: “I am hopeful that the Government will continue with this common-sense approach and consider indexing both the £50,000 annual allowance and the £1.5m lifetime allowance limit on an annual basis.”
Pension tax relief changes
- Annual allowance for pension tax relief reduced to £50,000 from April 2011
- The £50,000 limit includes individual and employer contributions and is inclusive of tax relief
- Pensions tax relief can be claimed at a saver’s marginal rate
- New lifetime allowance set at £1.5m, down from £1.8m, is to apply from April 2012
- Savers currently entitled to primary or enhanced protection will continue to receive this protection
- The Government is currently consulting on new protection rules to protect any savers with benefits currently worth more than £1.5m but less than £1.8m and not covered by existing protection
- The Treasury estimates that the reduction in the annual allowance will affect 100,000 pension savers and the lower limit will raise £4bn in additional revenue