Will widely expected pension tax changes in the Budget this month strengthen the incentive to save or help close the Budget deficit?
With less than a fortnight to go before we find out what George Osborne has in store for pensions this time, speculation is rife that more fundamental reform could be on the table.
But pension savings have already taken a big hit from previous changes introduced by this Chancellor.
Aegon is highlighting the windfall the Chancellor is already receiving from the pension freedoms he announced in his Budget two years ago and which went live last April.
Under the pension freedoms, individuals can now take as much as they like out of their defined contribution pension pots from as early as age 55.
However, after the first 25% which is currently tax free, the rest is taxed at the individuals ‘marginal’ income tax rate which can be up to 45%.
Aegon used a a Freedom of Information request to discover that another of the Chancellor’s pension tax changes, which has chipped away at the total amount which can be held tax free in a pension, has generated almost £100m in additional tax revenues.
The Freedom of Information request found that as a result of reducing the lifetime allowance from £1.8m to £1.25m in 2014/15, pension savers paid £94.2m in extra income tax as a result of having exceeded the allowance.
[tweet_box]Pension savers lost nearly £100m in tax charges when the lifetime allowance was reduced[/tweet_box]The Chancellor has announced a further reduction to in the lifetime allowance from £1.25m to £1m from the 2015/16 tax year.
Assuming the lifetime allowance reduction to £1m continues as planned following the Budget, what steps have you taken to ensure that your pension pots are protected?
Later this year it will be possible to apply for Individual Protection 2016 and Fixed Protection 2016.
These forms of registration with HM Revenue & Customs offer some protection against the lifetime allowance reduction, each with their own rules attached.
Because Fixed Protection 2016 is only available if you cease pension contributions and benefit accrual before 6th April 2016, it is important to review your lifetime allowance position before the end of the tax year.
