Politics and Pensions

Pensions have always received tax incentives to encourage people to save for retirement. Governments have always had to balance this objective against the need to raise tax to cover expenditure.

Over the past 20 years we have seen regular changes to pension rules due to this conflict with the pendulum swinging back and forth in terms of how much can be paid in with tax relief, how they are taxed on death, how much can be built up in a lifetime and how much can be taken out as tax-free cash. Each change left behind elements of the old system creating a complicated tangle of rules.

Pensions are currently in a relatively good place in that tax relief on contributions is available at up to marginal rates of income tax, people can pay in up to £60,000 gross per year, there is no tax on death (subject to the pension structure) and the Lifetime Allowance has been abolished. This has not created simplicity as we now have another system for calculating tax-free cash under which in some cases clients can elect to adjust upwards their personal maximum tax-free cash, provided they follow a process to apply for a certificate.

What might an incoming Labour Government do?

They have already made some firm commitments not to raise the rate of the major taxes such as income tax and national insurance. This does not leave much room for manoeuvre on raising money other than adjusting or bringing in new allowances. There are no details in their manifesto on pension allowances though there is mention of a review of the ‘landscape’. Rachel Reeves, the shadow Chancellor, did say they would review the Lifetime Allowance after its abolition was announced but there are more recent reports saying this may not be the case.

Income Tax relief – this is huge ‘cost’ to the treasury though at the same time the main reason people fund pensions as a way of saving for retirement. Over £50 billion per year. A new Government might look to reduce relief either by reducing the Annual Allowance for pension contributions or, more radically, by capping tax relief at either base rate or some new lower level.

Death Benefits – pensions are exempt from Inheritance Tax meaning wealthy people can use larger pots as an estate planning vehicle. This advantage is relatively new as it came in to force in 2015. It could be reviewed.

Tax free cash – pensions pay out up to 25% tax free. This is capped. I would be surprised if this changed but I would expect the cap to stay flat rather than be indexed over time.

The Lifetime Allowance – this was abolished only 2 months ago. It could return or a new system could be designed to tax those with very large pensions. The difficulty here is that part of the stated reason for abolishing it was to prevent doctors being taxed to the point that they retired early. It would also involve creating yet another layer of pension rules in this area which was already very complicated.

My view is that nothing is certain other than that there is a very high chance that some of these rules will change.

There is arguably a moment in time to look to fund pensions using the current allowance system and generous marginal rate relief.

There may also be a case for some people with large pensions who may be looking to take benefits in the next few years to consider doing it under the current regime where there is no Lifetime Allowance. This is not a guarantee to avoid any potential future system and it does have a significant downside in terms of exposing more assets to Inheritance Tax.

Pensions should be reviewed regularly in any case and people with larger pensions should be taking advice now.

* The information provided in this blog post is based on speculation and predictions. Actual changes to pension rules under a new government may differ from the views expressed here.