Autumn Statement: tax relief for pensions cut to £40k

The Government today announced in the Autumn Statement that the pension annual allowance will be reduced from £50,000 a year to £40,000, with effect from 6 April 2014.

Related topics:  Retirement
Amy Loddington
5th December 2012
Retirement
The £50,000 limit has only been in force since 6 April 2011, and prior to that it was a much larger figure of £255,000 a year.
 
This change will primarily affect:

- people in defined benefit (or final salary) pension schemes, especially those who have longer service or higher salaries. Many of these people will work in the public sector, such as teachers, doctors and civil service workers.

- self employed people who often pay money into a pension scheme on an occasional or fluctuating basis depending upon the profits their business is making.

The Government will also raise the capped drawdown limit from 100% to 120%, giving pensioners with these arrangements the option of increasing their incomes.
 
The Chancellor said:

"99% of pension savers make annual contributions to their pensions of less than £40,000. The average contribution to a pension is just £6,000 a year. I know these tax measures will not be welcomed by all; ways to reduce the deficit never are."

Andrew Tully, Pensions Technical Director at MGM Advantage said:

“This sends the totally wrong signal to savers across the country who are trying to do the right thing.  It is not so much the 1% of wealthy people who are immediately impacted by this change, but the legacy of undermining yet again the pensions system when we least need it.
 
“While this is a short-term win for the Treasury, in the longer term it will have a detrimental impact on savings in the UK. We need a simple, consistent savings system that people can trust. And which encourages them to save as and when they can afford to do so, without having to worry that rules will change next year or the year after.
 
“We should not forget the moderate earners who have long service in defined benefit pension schemes, such as teachers, doctors and civil servants who potentially face tax charges as a result of these changes.
 
“There may be an opportunity for some to pay larger contributions this year and next using the carryforward rules which allow higher contributions to be made by using unused relief from the last three years.”

Paul Sweeting, European head of strategy at J.P. Morgan Asset Management, commented:

"The number of people affected might be small, but there is a bigger issue here - if there are doubts over the future tax treatment of pensions, people at all income levels might be less willing to save into pensions vehicles.

"However, retirement is about more than just pensions.  Other tax-favoured vehicles such as ISAs have an important role to play in providing retirement income.  It is important that individuals are aware of this, and plan for retirement using the full range of investment vehicles available."

Otto Thoresen, Director General of the Association of British Insurers said:

"Changing pensions tax allowances for the second time in three years is frustrating although we understand the economic pressures facing the Government.

"It is now vital that ministers commit to these thresholds and avoid further tinkering if long-term savers are to be encouraged to put aside income for their retirement.

"Pension tax reliefs help avoid double taxation and encourage people to be self-reliant in retirement so it is in everyone's interests that savers feel confident in the stability of the system."

TISA Director of Policy Malcolm Small said:

“The Chancellor delivered mixed news for the future of pensions. Cutting tax reliefs will be yet more evidence for a suspicious public that the Treasury views pension savings as a cash cow. That is another blow to public confidence at a time when we should be encouraging people to put money aside.

"By contrast, increasing the drawdown rate and expanding the scale and range of tax exemptions for ISAs are both welcome steps. What we need is a coherent strategy for retirement saving – rather than giving with one hand and taking with the other."

Commenting on the Chancellor’s decision to cut pensions tax relief to £40,000, Patrick Reeve, Managing Partner at Albion Ventures LLP, said:

"This cut in pension tax relief will increase the drive by many higher earners towards other tax efficient routes to build their retirement nest eggs, such as Venture Capital Trusts.  VCTs are an excellent supplement to pensions, as unlike the latter they’re not subject to income tax as they are drawn down. 

"VCTs also offer a tax free income with 30% up front income tax relief, tax-free capital growth and tax-free dividends.  With VCTs there’s no need to buy an annuity and pre-retirement you can roll up your dividend income into new shares, gaining an extra 30% income tax relief on the value of the dividend.

“We have already seen a steep rise in enquiries from investors looking to supplement their pension pots through VCTs.”
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