General

5 Days Till Autumn Budget – Should I Put More Money In My Pension Now?

With the Autumn Budget being brought forward to Monday 26th October to avoid clashing with the Brexit negotiations, rumours have circulated that the Chancellor Philip Hammond will target the £41 Billion (2016-17 HMRC) higher-rate pension tax relief to finance his £20 billion pledge to the NHS each year by 2023.

The Chancellor has said recently that Pension tax breaks have become “eye wateringly expensive”.

This comment from a Chancellor who has to find £20 billion in  funds for the NHS cannot be brushed aside.

Hammond at the IMF  Talks in Bali declaring pension reliefs “eye wateringly expense” // BBC

The easiest route of financing these commitments is a marked reduction in the £40,000 pension annual allowance to say £20,000. At the same time, he might reduce the carry forward to the same level or even remove carry forward provisions entirely.  This would mean a potential contribution of up to £160,000 in contributions could be reduced to £80,000. Still sounds a lot but for a number of people, especially self-employed, the ability to pay more into their Pensions in the “good” years has been a vital weapon in their Pensions armoury.

He would have to make the change immediate to prevent a rush in contributions to claim their tax relief, not only defeating the purpose of the policy but causing the Treasury losses not gains.

Flat-Rate in line with other tax legislation?

A more thorough move would be introducing a flat rate pension tax relief. The previous Chancellor, George Osborne, stopped just short of implementing changes, although the former Pensions Minister Steve Webb pressed hard for the change.

Higher rate earners would lose their 40% tax relief on earnings above £46,350 only seeing 20% instead of 40%.

Proponents of pension overhaul to address the savings inequality, The Resolution Foundation think tank, declared a ‘flatter system at 18% for basic-rate and 28% for higher-rate payers, in line with capital gains would help solve wealth inequality’.

While we are battling the European behemoth at the negotiating table, the potential for such a sweeping reform is unlikely, yet incremental adjustments are more probable. Steve Webb himself now says;

“I do not believe we will see a flat rate of pension tax relief being introduced. It is such a big project and there will be plenty of losers. I don’t think it is something a politically weak government can introduce at this time.”

Why?

Potential to raise taxes through other means, such as income taxes, would be comparable to political suicide. Fuel duty freeze is locked in, NICs increase plans were scrapped, and other sources have already been pillaged or strained to breaking point.

How to respond?

Higher-earners should be reviewing their pension tax relief plans. We are once again reminded the nest eggs for retirement are the low-hanging fruit for Chancellors unwilling to borrow more against Public Sector Net Borrowing.

In the meantime, bringing forward pension contributions, bearing in mind, if appropriate, the £1.03 million lifetime allowance is a MUST!

Richard Bolton
Richard Bolton was born in the UK and is a Manchester University PPE graduate. He is an insurance broker / wealth manager. Areas of intrigue include global political affairs, culture and nascent technologies. In his spare time, Richard is a keen sportsman and speculator in new business ventures.

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