Budget Day will be 8 March 2017 and every year we expect the Chancellor to do something to restrict tax relief for pension contributions.
In recent years the annual allowance for contributions has been reduced from £255,000 in 2010-11 to £50,000 for each of 2011-12, 2012-13 and 2013-14 and then to £40,000 for 2014-15 and 2015-16. For 2016-17 (the current tax year) the allowance stays at £40,000 but is steadily reduced for anyone with income of more than £150,000, reducing to a minimum allowance of £10,000 when income reaches £210,000.
Apart from this tinkering with the annual allowance, we have seen restrictions placed on the amount of pension fund which can be built up tax-free. This “lifetime allowance” was £1.8 million in 2011-12, reducing to £1.5 million in 2012-13 and 2013-14, £1.25 million in 2014-15 and 2015-16 and now to £1 million in 2016-17. It must be emphasised that the figure quoted is the value of the fund at retirement so a relatively modest fund value today could still breach these limits in 10 or 20 years’ time. You can apply to protect these limits in case they fall any further but that comes at the price of not being allowed to pay any more contributions.
It does seem that in recent years the Government’s approach has shifted from encouraging people to provide for their retirement, towards penalising them if they take this too far. Given the low interest rates we are seeing at the moment it does seem rather surprising that a fund of more than £1 million is seen to be excessive.
Recent suggestions have been to abolish higher rate tax relief on contributions, or perhaps introduce a new tax rate for pension contribution relief of maybe 25%. This would perhaps have the “merit” of encouraging basic-rate or nil-rate taxpayers to contribute more to their pensions. There has also been talk of plans to abolish or reduce the tax-free lump sum (currently 25% of the value of the fund).
Whatever changes the Chancellor makes to the pension legislation in his Budget on 8 March, it would be surprising if he relaxed the position. It is perhaps more likely that any changes will be disadvantageous.
With that in mind, it might make sense to make any planned pension contributions before rather than after 8 March, just in case, but do be aware of the possible restrictions because the penalties for transgression can be severe.
Although pensions have often received a bad press, they do have some significant tax advantages. There is still as I write the entitlement to take 25% of the fund tax-free once you reach age 55 and the entire fund can be passed to your descendants free of inheritance tax (IHT) if you are unfortunate to die before reaching age 75. Pension funds are still outside IHT even after that age but any withdrawals are then taxed as income on the beneficiaries. It is therefore now more likely that pension funds may be established for the benefit of passing funds to the next generation whilst the “pensioner” lives on other savings such as ISAs.