11th March 2016
Pension savers may be breathing a sigh of relief over the decision to leave tax relief alone but one expert warns they should not be too complacent.
Andy Cumming, head of advice at Close Brothers Asset Management, said the backtracking on reform of pension tax relief – which he announced last week would not be included in the Budget – was not the end of the matter.
‘Let’s be clear, this is likely to be kicking the can further down the road to a more politically apt time, than abandoning the idea completely,’ he said.
‘To reaffirm savers’ confident in the long-term security of pensions, we need to see a sustained period of stability following the raft of reforms we have already seen.’
However, he said that this is unlikely and predicted further tinkering in the Budget that will impact pension savers and those on higher incomes, including a further cap on the pension annual or lifetime allowance.
‘There could be another speed bump to saving in the form of capping the annual and lifetime allowance, currently £40,000 and £1 million respectively – the latter already due to be cut from £1.25 million in April,’ he said.
‘Both may seem generous at first glance, but the lifetime allowance penalises successful long-term investment, and a much higher proportion of the UK population than people realise will be affected after 40 years of pension saving. Equally, for those who have paid off their mortgage and increased pension payments as they get closer to retirement, a move to reduce the annual allowance could prove costly or prolong the period they need to contribute for.’
The tackling of salary sacrifice has long been mooted as an area for reform and has come to the forefront as part of pension tax relief reform discussions as higher earners could look to use it ‘to overcome the proposed introduction of the flat rate tax relief’, said Cumming.
‘With so much possible policy change, the Budget is fast overtaking the end of the tax year in significance for pension savers, with an increasing number adopting a “use it in case you lose it” approach to their contributions,’ he said.
It may not all be bad news though as there is the potential for the chancellor to bring forward plans to raise the threshold for 40% income to £50,000 – a plan he said he is working towards.
‘This would ease thousands out of the higher rate tax bracket; a huge relief particularly for those on the threshold. We may also see a faster increase to the personal tax free allowance, which will increase people’s disposable income and ability to set aside money each month,’ said Cumming.
‘Whatever is announced, the vital thing is that people continue to save, and we need some consistency in the pensions market for this to happen. Constant change is incredibly confusing, both for younger savers involved in auto-enrolment schemes to those ‘at’ or in retirement making crucial decisions on their pension provision.’
He said constant shifting within pension policy makes it easy ‘to bury heads in sand and prioritise short-term financial goals’.
‘We can’t be in a position where legislation – which should ultimately be making things easier – actually deters long-term saving. Longevity will continue to increase, so this is more important than ever,’ he said.