In a continuation of their usual headline themes (cold weather, Princess Diana and pensions), the Daily Express today claims that we are facing a new tax raid on pensions.
The front page article suggests we will see higher rate tax relief on pension contributions scrapped and the taxation of the pension commencement lump sum (commonly known as ‘tax-free cash’).
This “double-whammy” would represent a massive blow for savers as the government encourages us all to take more personal responsibility for our income in retirement.
Whilst there is undoubtedly great pressure on public finances, an overt attack on pensions like this would be terrible news for the UK savings culture.
We also suspect it would go against Tory principles. If higher rate tax relief or tax-free cash availability is cut, it would most likely be the result of pressure from their Lib Dem coalition partners.
One way the government could limit higher rate tax relief would be to lower the annual allowance for tax privileged pensions savings from the current level of £50,000. We would not be surprised to see this cut to around £35,000, as was originally suggested when the annual allowance was introduced.
There is also the option to include the annual ISA allowance within the £50,000 annual allowance figure, effectively reducing it by a little under £11,000, although this would create an even more complex system of allowances.
An attack on tax-free cash would be harder to implement.
It could be introduced by lowering the percentage of pension funds available as tax-free cash from the current level of 25%. This approach might even include a reference to the Standard Lifetime Allowance, limiting total tax-free cash to a percentage of this.
One potential issue with this approach is that many people plan to repay their interest-only mortgages using the tax-free cash from their pension savings.
Any attack on higher rate tax relief or tax-free cash would damage confidence in pensions as a savings vehicle.
What pensions really need is a spell of consistency in terms of rules and regulations.
We have regularly called for the government to hand responsibility for all pensions policy over to an independent committee, much like interest rate decisions are now the responsibility of the Bank of England.
We can hope that the Express is wrong on this issue. Rumours such as these tend to circulate ahead of every Budget, with the current economic climate adding more weight to them this year.
If you were planning to make a large pension contribution or take tax-free cash from your pension at some point this year anyway, taking this action ahead of the Budget on 21st March could be advantageous. Speak to your adviser.
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Photo credit: Flickr/Alan Feebery
