Tuesday, 21 February 2012

Pre-Budget 2012 – An end to pensions for high-earners?

It has become a regular feature of pre-Budget speculation that the Government will remove higher-rate tax relief, although this is the first year that we actually have a Cabinet Minister openly making the case for such a change.

Restricting tax relief to the basic rate seems unlikely in my view, on the basis that this would simply kill pension savings. Why would advisers recommend investing for 20% tax relief to fund a pension on which you pay higher-rate tax?  A pension scheme is essentially deferred income, with restrictions on how and when you can take it, whereas capital built up from savings and other investments remain under your own control.

As ever the devil will be in the detail.  If they remove higher-rate tax relief on personal contributions, how will they treat final salary scheme accrual and employer contributions to personal pensions?  If these contributions are still tax deductible then employees could take advantage of this by using salary sacrifice arrangements instead, potentially leading to a reduction in the National Insurance take.

It would be simpler to reduce the annual allowance down from £50,000, although it has only this year fallen by £205,000 to this new lower level.

If higher-rate tax relief were to be restricted, the simple message is that pension savings in the future will be negatively impacted.

So we believe that on top of the removal of dividend tax credits, and the seemingly endless Government changes to so-called ‘pension simplification’, this would be the penultimate nail in the pensions’ coffin.

However, while for these reasons it may only be kite flying by Treasury Ministers as in the past, if you can top up within the new limits or carry forward unused allowances, I can’t think of a reason not to do so before 21st March.

John Fletcher, Divisional Director - Financial Planning

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