In order to fund COVID-19 recovery efforts, the government has set its eyes on pensions, putting savers at a disadvantage. Current plans mean pensioners should avoid the worst of the raid, but workers will bear the brunt with three different reform plans being discussed.
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Targeting pensions tax relief
Pension reform threatens the savings of millions of people, as the Treasury considers changing the way it pays out tax relief on workers’ pension contributions.
Currently, saving is incentivised because tax relief is paid at a person’s marginal rate of income tax. Chancellor Rishi Sunak is contemplating limiting tax relief on pension contributions to a flat rate of 30%. For workers who are paying 40% or 50% income tax (higher-rate and additional-rate taxpayers, respectively) this would mean a significant reduction to the boost that your pension savings get from the relief.
What could this mean for you?
For example, if a higher-rate taxpayer contributes £8,000, they get £2,000 in tax relief and an additional £2,000 reimbursement upon completing a tax return. Essentially, it means you could effectively save £10,000 and it would only cost you £6,000.
Under the new 30% flat rate rules, the same contribution would only receive £3,000 in relief/reimbursement, costing you £7,000. This means you need to save more yourself to make up for the lost government relief if you don’t want to get knocked off track on your journey to your retirement savings goals.
On the other hand, basic-rate taxpayers would actually benefit from the reforms as their rate would increase from 20% to 30%. But there’s no doubt that a flat-rate across the board would impact higher earners the most.
Many industry experts believe that the Treasury won’t settle on 30% though, as it won’t make enough of an impact on taxes and perhaps might agree to a lower flat rate instead.
Possible additional changes
There has also been talk of reducing the pensions lifetime allowance – the limit that savers can put into tax-free pension pots – from £1,073,100 to as low as £800,000. The Chancellor has already frozen the threshold for the next five years.
This move would further restrict pensions savings and millions of workers would face charges for exceeding the limit. If you already have more than the newly reduced limit at the time of the rule change, you would most likely be eligible for “lifetime allowance protection” to help mitigate the effect of taxes.
Additionally, the government is considering introducing a charge on employer contributions that could discourage employers from increasing their contributions and possibly reduce pension savings overall.
Help is available
Not sure how pension reform will affect you? Read our latest ‘Pension boost’ guide and get in touch with an adviser who can help you plan for any and all possibilities.
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