30th April 2015
Reading the pensions proposals within the major parties manifestos, anyone earning over £150,000 per annum would be forgiven for wondering what they had done wrong writes Matt Phillips, head of wealth management at Thomas Miller Investment…
Rarely do the main parties agree but Labour, the Liberal Democrats and the Conservatives have all proposed severely reducing pensions tax relief, if elected. Putting aside for a moment the debate of whether the policies are anti-aspirational, let us look at what is being proposed, how it links in with the recent budget announcements and what higher earners should be doing before the election to make sure they minimise the impact regardless of which party or coalition is elected on 7 May.
The Conservatives have proposed reducing the amount high earners can contribute to a pension. Each year everyone has an Annual Allowance of £40,000 that they or their employer can contribute to a pension. For those earning over £150,000 the Conservatives are proposing a gradual reduction in the Annual Allowance. For each £1 earned over this limit, there will be a 50p reduction in the Annual Allowance until it reaches £10,000. Therefore, anyone earning in excess of £210,000 each year will only be able to contribute £10,000 to a pension tax efficiently. For high earners, a pre-election pension contribution looks attractive in the event of a Conservative lead government after May.
The Labour manifesto is a little light on detail, stating that they will restrict pension tax relief for high earners. However, Ed Miliband announced earlier this year a proposed reduction in the Annual Allowance to £30,000 and basic rate tax relief only for those earning above £150,000 a year. So once again, a pension contribution before a Labour administration comes to power looks attractive for high earners.
The Lib Dems have stated that they will establish a review to consider the case for a single rate of pension tax relief which is higher than the basic rate but lower than higher rate. Previous speculation on a single rate of tax relief has suggested 25% as a likely figure. And guess what? For high earners, a pre-election pension contribution looks sensible in case we have a Lib Dem backed government after May.
So what now?
Well, it looks pretty certain that funding a pension after the election will look a lot less attractive than it does now. Add in the 2016 reduction in the Lifetime Allowance to £1m and it may well be beneficial to make one last contribution before the 7 May and take a long close look at applying to retain the current £1.25m Lifetime Allowance by opting out of further pensions savings altogether. Don’t forget it is not just this year’s £40,000 that can be contributed before the election but also any unused relief for the past three years. If people do opt out of pensions, the question is then how and what do they save into?