Are we entering a Golden Age for pensions?
The annual UK political conference season is a time for the party leaders and their front-bench teams to attempt to grab the headlines by setting out bold new policies and, of course, to take a pot shot at those of their opponents.
This year’s conference season has had special significance, as it is the last one before the General Election on 7 May 2015, so the parties have been keen to open up some clear blue water to demonstrate distinctive differences between them.
Chancellor vows to remove death tax on pensions
Major policies announced during this conference season have included Labour proposing a ‘mansion tax’ on properties worth over £2 million and a windfall tax on tobacco companies, and the Conservatives vowing to abolish the 55% death tax applied to pension pots from April 2015. The latter would enable investors to potentially pass on their pensions to their beneficiaries free of tax. The devil of course will be in the detail, expected in the Chancellor’s Autumn Statement on 3 December, but this is seemingly very good news which could potentially enable pensions to be passed through generations without Inheritance Tax.
Greater flexibility for pensions is coming
This latest announcement on pensions supplements the radical shake-up announced in the last Budget which, when introduced in April 2015, will mean pension savers will have much greater choice over what they can do with their pensions at retirement, including cashing the pension in (subject to taxation), purchasing an annuity to achieve a guaranteed income stream, or keeping the pension portfolio running and draw an income from it (drawdown).
In our view, given the combination of the current levels of tax relief available on pensions, the flexibility being introduced next April on how a pension can be accessed at retirement and the apparent intention to enable pensions to be passed on without punitive tax charges; pension investing looks like it could be set to become more attractive than at any time in recent history – subject to further detail on the latest announcement.
Current pension tax reliefs are available at your marginal rate
Of course future rules can change and with a General Election coming there is no certainty that the current treatment of pensions will continue. For example Labour intends to reduce the level of pension reliefs available for contributions for the highest earners. Official Liberal Democrat policy is to seek a further reduction in the pension lifetime allowance from £1.25 million to £1 million (though Liberal Democrat pensions minister Steve Webb has publicly called for the allowance to be scrapped in favour of a flat rate of relief on pension contributions, rather than at the investor’s marginal rate of tax).
What we do know is that currently, effective tax relief is available at an investor’s highest marginal rate, meaning a 45% tax payer can potentially achieve £10,000 of pension investment at a net cost of £5,500. While the maximum annual gross contribution is now capped at £40,000, an investor who has not fully used their pension allowances in the three previous years can ‘mop’ these up through a process known as carry forward and receive relief against their Income Tax liability for the current year. However, this is a complex area and advice should be sought. Once invested, investment returns within pensions are free of Capital Gains Tax and do not need to be declared on an Income Tax return.
To find out more about pensions, download a copy of our Planning for Retirement
guide, or call us on 0203 1316 167 to arrange an appointment with a financial planner in your area.
This article is not advice to invest or to use our services. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change. Investments can go down as well as up.