How has the Budget affected the pension scene – and how might these and future changes impact your long-term retirement prospects?

Successive changes made to the pension rules by the Coalition and the new Conservative government will save the Treasury billions.

Last year the OBR estimated that Gordon Brown’s maverick raid on pension funds in 1997 when he removed the dividend tax credits saved the Treasury £118 billion between 1997 and 2014.

There is now some speculation that the changes brought in since 2009 together with the possible outcome of new Government consultations due to close in September may bring in the same level of savings for the Treasury.

Much has flowed from the Summer Budget but in a nutshell on 8 July Osborne confirmed three key items:

• Re-confirmation that the LTA (Lifetime Allowance) will be reduced from £1.25m to £1 m effective from 6 April 2016 (it will then rise in line with CPI from 6 April 2018)

• The Annual Allowance (the max you can put into pension plans before being penalised), already reduced to £40,000 p.a., was further reduced on a tapering basis for those earning £150,000 p.a. or more. If you earn £210,000 or more the AA reduces to £10,000

• A Green Paper consultation launched to consider the replacement of upfront tax relief on pension contributions going in with a higher level of tax free payments when benefits are paid out. 

As always there is a further flow of information surrounding the key points after these announcements. Critically, these are:

Pension contributions paid by employers will count towards ‘earnings’ for the purposes of calculating the reduced Annual Allowance. This could bring employees earning above £110,000 into a reduced Annual Allowance – further clarification from HMRC is awaited.

Osborne has stated that in the new consultation there is no pre-judgement of the outcome.  However, it is interesting to point out that if all tax relief was removed on all pension contributions and all pension withdrawals were tax free, the equivalent tax saving to the Treasury exactly equates to the removal of the current 25% tax-free lump sum!

The Green Paper suggests that to preserve an incentive to make pension savings (rather than ISA savings, for example) the Government may consider a matching contribution rather than giving tax relief.  There is no clue how this may operate but we foresee many problem areas in such a radical change.  Responses must be in by 30 September 2015.

Quite separately, the OTS (Office for Tax Simplification) has published the terms of its study on aligning income tax and NIC. One of its mandates is to look at the removal of employer NIC relief on employer pension contributions.  This of course will include any salary sacrifice contributions which have been very popular in the Auto Enrolment pension world.

About the author:

Richard is co-founder and chairman of RetireEasy.co.uk, an online tool for retirement planning