The Chancellor faces some thorny decisions in the Autumn Budget. There is some speculation that pensions fund tax relief may be up for revision. If so, this will have considerable implications for how people approach saving for retirement.
This year’s Autumn Budget has been announced as Monday 29 October. It comes at a time when there is, arguably, more uncertainty than usual with additional pressures around the terms of Britain’s withdrawal from the EU.
Funding needed from… somewhere
Chancellor of the Exchequer, Philip Hammond, has previously promised to build a stronger economy and support public services, pledging £3 billion of spending on Brexit planning. This additional spending sits alongside a commitment of an extra £20 billion a year for the NHS by 2023, so this year’s Budget, the last before Britain leaves the EU, has some interesting challenges for the Chancellor.
Following Theresa May’s Conservative Party conference address, people are speculating where the money to fund an end to austerity will come from. One area that has been widely discussed is that of pension tax relief.
A recent publication by The Centre for Policy Studies has said that pension tax relief should be scrapped and replaced with bonuses on individual and employer retirement contributions.
This follows a general acknowledgement that tax relief does not act as an incentive due to the relative complexity of the pension’s framework. The report goes on to propose a tax structure for pensions more akin to ISAs, where they are taxed on entry but free of tax on exit.
Touted changes to Annual and Lifetime Allowances
Alongside this report, the Treasury Select Committee have suggested that the Government should give serious consideration to “replacing the Lifetime Allowance with a lower Annual Allowance, introducing a flat rate of relief and promoting understanding of tax relief as a bonus or additional contribution.”
A critical aspect to all this speculation is that tax relief is not really intended to be an incentive to save but rather works to ensure that savings are not double taxed: on the way in and on the way out. Moving to a form of bonus incentive doesn’t necessarily address the issue that people are not saving enough for retirement and it remains to be seen whether replacing relief with a bonus incentive would deliver the estimated £10 billion worth of savings to the Exchequer.
Levelling the playing field for tax relief?
Looking at the Treasury suggestions there is some merit in introducing a flat rate of relief. At present the top 1% of earners are receiving double the relief of half the working population. A flat rate would go some way to correct this imbalance. Further options to consider are a reduction in the Annual Allowance and reduction in the high earners’ allowance where relief is capped for individuals earning over £150,000.
Perhaps now is not the time
Thus far the government has resisted pressure for changes to pension’s tax relief, saying there is “no clear consensus” for reform. Given the current political situation with Brexit and a relatively weak majority, it remains to be seen how brave the Chancellor can be in this area so we may not see any radical changes this time around.
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