With the Budget due soon, here’s a quick summary of the current state of play on pension taxation. Tom McPhail, Head of retirement policy – Hargreaves Lansdowne.
When bank robber Willie Sutton was asked why he kept robbing banks, he famously replied “Because that’s where the money is.” In recent years the Treasury has repeatedly raided the UK pension system, salami-slicing away at the tax reliefs available to investors. Given the Exchequer foregoes a total of around £48 billion a year in revenue through various concessions to pension investors, this is perhaps understandable; pensions cost more than this country’s entire defence budget.
Every Budget and Autumn Statement has brought with it the risk of further change, often for the worse as far as investors are concerned. Tom McPhail, Head of retirement policy: “In 2015 the Treasury launched a sweeping review of pension taxation, because the system is both extremely generous to investors but also riddled with inconsistencies and complexities. This means you can do very well out of the tax breaks but making sense of them can be challenging. The Treasury eventually put any major reform on hold but this was largely for political reasons, the system is still ripe for reform; investors should work on the assumption that it is simply a matter of time before the government revisits the issue.”
“On balance, we think it unlikely we’ll see major upheaval on pensions in this Budget: the government has too many other challenges to deal with and we think it unlikely they’ll go looking for trouble on this contentious issue at this time. Having said that, there is always the possibility they’ll salami-slice away a little more of an allowance here or there, so anyone thinking of making an investment in their pension this tax year might want to act ahead of the Budget, just in case.”
Recent changes to pension taxation
- 2017 – Money Purchase Annual Allowance set to fall from £10,000 to £4,000
- 2016 – Tapered annual allowance introduced. Lifetime allowance falls from £1.25m to £1m
- 2015 – Introduction of the Money Purchase Annual Allowance. Comprehensive review of pension taxation announced (leading to the introduction of the Lifetime ISA)
- 2014 – Annual Allowance falls to £40,000. Lifetime allowance falls from £1.5m to £1.25m
- 2012 – Lifetime Allowance falls from £1.8m to £1.5m
- 2011 – Annual Allowance falls from £255,000 to £50,000
- 2009 – Annual Allowance cut in April for earnings over £150k. Cut in December for earnings over £130k
The Money Purchase Annual Allowance
In the Autumn Statement 2016 the Treasury announced a plan to cut the Money Purchase Annual Allowance from £10,000 to £4,000 with effect from April 2017. This would severely limit the scope for further pension saving for anyone who had flexibly accessed their retirement savings. After reviewing their plans and having explored all possible alternatives, Hargreaves Lansdown responded to the Treasury consultation with a robust recommendation that they abandon the proposals and make no further changes at this time.
We expect to hear the outcome of the consultation as part of the Budget announcements.
Apart from the MPAA, what other areas of pension taxation could the Treasury look at?
Annual Allowance: Currently £40,000; it could be reduced a little further.
Lifetime Allowance: Currently £1million; it could be reduced a little further but many believe it has already come down too far and should in fact be abolished altogether.
Annual Allowance taper: Starts at earnings of £150,000, takes full effect on incomes above £210,000; the starting threshold could be reduced.
Employer tax relief: Pension contributions are a tax-deductible business expense. Unlikely they’d abolish this but they could stretch out the period over which relief is granted on final salary scheme deficit reduction contributions.
National Insurance relief: Currently pension contributions are not subject to NI deductions; this could be partially or even completely abolished.
Tax relief on pension investments: Pension investments grow largely tax free; this could be tinkered with but it’s unlikely.
Other pension policy activity
- Pension Schemes Bill to regulate Master Trusts
- Auto-enrolment review
- Defined Benefit pensions green paper
- Cridland review of state pension ages