Will the high level of government spending during COVID lead to a raid on pension pots?
Plans laid out by the treasury to fill the hole left in public finances from their spending over the pandemic, include a number of changes that could lead to higher earners being substantially worse off in their retirements.
The three key reforms that are being considered are as follows:
Limiting tax relief on pension contributions to a flat rate of 30%.
Currently, tax relief is paid at a person’s marginal rate of income tax. This means that if your income tax rate is in the higher 2 brackets of 40% or 45%, you would see a reduction in the relief you receive on pension contributions by 10-15%.
However, the majority of people who are earning in the lower tax thresholds would stand to benefit from this change. For example:
Under the new flat rate system, a 35-year-old who earns £60k and pays 4% of their income into a pension, would be £25k worse off by the time they reach retirement age, but if the same person was earning £30k and paying the same 4% in, they would be £12.6k better off than where they currently would be by retirement.
The bad news is that many people consider it unlikely that they will settle at 30% given the fact it wouldn’t raise nearly as much as needed, and some have predicted the flat rate could be as low as 20%. If that was the case then the 35-year-old earning £30k would neither be better or worse off than they are under the current system, whilst the higher earner would be £50k worse off.
Lifetime Allowance
We have seen the lifetime allowance cut before from £1.25m to £1m back in 2016. Since then it has risen in line with inflation until Rishi Sunak froze the threshold for the next 5 years. Targeting lifetime allowance is an easy way for them to replenish the coffers and the current discussion could lead to it being slashed to as low as £800k. Should this happen, pension savers could find themselves with as much as £15k per year less as an income in retirement.
Taxing employer contributions
Currently, under the auto-enrollment rules that were brought in in 2012, companies must pay a minimum of 3% of an employee’s salaries into a worker’s pension. This is not taxed but adding a charge to that would likely discourage employers from increasing the amount they pay into that. As yet it is unclear what this would look like, but it would inevitably lead to a reduction in the amount people are likely to have in retirement.
As yet, nothing is confirmed and as with all changes, there will be subsequent opportunities or planning methods found that help individuals mitigate some of the impact. If you are concerned about how any possible changes may impact you, get in touch with us to speak to one of our advisers.
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