Savers beware: the politicians are back in meddling mode
It's September and that means party conference season: a chance for the UK's political parties to energise their faithful supporters, set out new policies and grab some headlines.
Roll back 12 months and talk of new "wealth taxes" was the order of the day. And while much attention at the time was focused on calls for a property-based "Mansion Tax", we warned that pensions might prove a softer target ("Will pensions be next in the firing line of the 'wealth tax' enthusiasts?" 26/9/12). Sure enough, a couple of months later in the Autumn Statement, the Chancellor announced sweeping cuts to both the gross annual pension allowance (from £50,000 to £40,000) and the lifetime allowance (from £1.5m to £1.25m).
Worryingly they are at it again....
Notwithstanding the fact that major changes were only made recently and the reduced lifetime allowance will only kick in next April, the politicians seem addicted to the idea of further meddling with the pension allowances.
At their conference last week the Liberal Democrats adopted a policy of further massive reductions in the lifetime pensions allowance to £1 million, while Labour's Ed Balls, the Shadow Chancellor, is targeting a cut in the level of tax relief available on pension contributions for high earners. Under current rules, tax relief on contributions is effectively available at an investors’ marginal rate.
In our view the arms race to out-do each other on policies to tamper with the rules governing people's retirement plans is toxic for confidence in the system. And not just for those likely to be directly impacted by such policies. It sends a signal to a much wider audience that the system is in constant flux and not to be trusted. This is deeply corrosive at a time when most people's pension arrangements are going to be woefully inadequate to meet their retirement needs.
Pensions are important and currently offer valuable incentives on contributions. However there is clearly no certainty that such pension allowances and relief on contributions will be so attractive in the future.
There are three things that investors might consider:
- If you are currently a higher or additional rate taxpayers, make use of your pension allowance in order to boost your fund and reduce your tax liability
- Those who are able to fully utilise their current year allowance but who have not done so in the three prior years should explore opportunities to mop up these unutilised allowances through an arrangement known as carry forward
- Investors with pension schemes that have a combined value in excess of the £1.25 million lifetime allowance being introduced next year should urgently consider whether they should take out some form of protection as set out by HM Revenue & Customs (HMRC).
The two types of protection that are likely to be available are ‘Fixed Protection 2014’ and ‘Individual Protection’. Full details of ‘Fixed Protection 2014’ have been given (must apply before 5/4/14), and preliminary details of ‘Individual Protection’ have been provided but these are only draft, could change and will not be finalised until after 6 April 2014.
- Fixed protection - fixes your LTA at £1.5 million but no further contributions can be made
- Individual Protection - proposes to fix your LTA at the value of your pensions on 6/4/14 up to a max of £1.5 million, however, you can continue to make contributions. Likely to be useful for clients who receive large employer pension contributions or members of good final salary schemes.
Download our guide Planning for Retirement or contact our team on 020 7189 2400 for more information.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. This article is not a personal recommendation, or advice to invest.