Thu, 4 Nov 2010

Pension tax relief plummeting

The Government has announced that personal tax relief on pensions will be lowered to £50,000 annually. This is over five times lower than the £255,000 previously allowed by pension savers, but more than the £40,000 ceiling anticipated following the coalition’s emergency budget in June this year.

Initial proposals, by the previous Labour Government, were designed to reduce the proportion of aggregate tax relief going to higher earners. The Financial Times reported this month that the percentage of tax relief going to those earning £150,000 or more accounted for a quarter of all tax relief on pensions despite those individuals totalling just 1.5% of all payments into pension funds.

Speaking at Payroll World’s Autumn Update conference, only hours after the news broke, Karein Davie from actuarial firm Hymans Robertson made clear that anyone earning over £250,000 per year and paying into a defined contribution scheme should consider paying savings into a corporate ISA rather than a pension to avoid an unexpected tax bill.

However she said for moderate earners the pension remains the most tax efficient way of saving for retirement. This proposals from HM Treasury also stipulate that raising the pension accrual factor – the multiplier designed to portray the eventual value of an annual pension contribution – from 10 to 16, will make more pension savers liable for a tax bill this year.

Chris Noon, Partner at Hymans Robertson, told Payroll World: ‘The proposals are significantly better than we had hoped for or were expecting and it’s clear that the Government has actually listened to the industry during the consultation process.

Examples of this include an annual tax-free pension saving allowance of £50,000 a year – 25% more than the £40,000 the Government indicated was the break-even point – and from April 2012, a reduction in the amount of tax-effective lifetime pension savings from the current £1.8m to £1.5m.’