With the Autumn Statement due on 23 November, the question we are all asking is will the Chancellor make changes to our pension tax relief? Or, will he leave well alone?
We know Chancellor Philip Hammond needs to save money. We also know that cutting pensions tax relief will not take money out of the economy in the short term. Therefore, changes to the tax relief seem likely, but we can’t be sure of when the Chancellor will make his plans known.
It has been proposed, that a new, age-related bonus approach is on the cards, which is reported to have some supporters within the Treasury. In my view, this approach is highly impractical. Potentially, individuals would receive a government contribution at a percentage rate of 100 minus their age. Therefore, someone aged 25 would receive a 75% match, whereas an individual aged 60 would only receive 40%. This would involve tax relief shrinking at the time in life when an individual finally wants to do something with his or her pension. It is an interesting proposition but to me, it lacks logic.
When looking back to the days of Executive Pension Plans, which allowed primarily owner directors to pay in larger contributions in years when they were doing well, funding was linked to salary bonus and taxable benefits in kind whilst taking into account years to retirement.
A cost-effective and flexible savings model is the Pension ISA. This for those people who have periods when they may urgently need access to cash the flexible savings model of the pension ISA may be a good option with these individuals able to draw on funds if needed. This flexibility will encourage some people to save where they otherwise would not.
Finally, there does need to be an incentive that is attractive to the people with small disposable incomes who are not financially astute and who if allowed would simply dip into the pension fund.
If I were to propose an approach to the pensions tax relief dilemma, I would apply a flat rate of relief of 30%. It would be more equitable to those on lower incomes and it targets incentives where they are needed. Under such a system it is much better for employers to pay pension contributions. This way, they avoid employer and employee National Insurance, allowing the relief to work out the same as the tax relief at the employee’s marginal rate.
The ideal outcome for not only my clients but everyone contributing to a pension, would be for the Chancellor to abandon the ridiculous tapering down of the Annual Allowance from £40,000 to £10,000 for earnings between £150,000 and £210,000 a year. Many people receiving bonuses at the end of the year will be unaware of how much of a tax-advantaged contribution they can make to their pension. In turn, this will result in large numbers of people over-contributing by the end of the financial year. Reform is needed.
Our current pensions system is not without fault. However, with a few changes it could be close. My view is that pension schemes should be targeted at specific groups and that pension products targeted within these groups would possibly work best.