If you did not get a chance to read all the Sunday papers, then you may have missed a most disturbing article in the Telegraph suggesting the Government is considering attacking the tax relief you receive on your savings!
The Government has shown renewed interest in abolishing higher-rate pension tax relief, according to a report in the Sunday Telegraph. The Lib Democrats talked about this before the general election and it was considered by the current Government before it decided to rather cut the annual allowance from £255,000 to £50,000. The Telegraph suggests that the Chancellor is now reconsidering cutting higher-rate relief as he fights to cut back the public spending. They say doing away with higher-rate relief would save the Government £7bn each year.
Currently, higher rate tax payers (those earning over £42,475 per annum) are able to invest £60 and receive a tax credit from the Government for £40 – meaning £100 is invested toward their retirement. So somebody earning £60,000 per annum who saves £300 per month into their personal pension would lose £1,440 per annum!
The situation is even better/worse for those earning over £150K per annum who can invest £50 and receive a £50 credit back.
The article also said that some hardened Tory MPs believe scrapping higher-rate relief could be the first step of a larger plan to kill off ALL rates of pension tax relief, except on employer contributions. This, they say, would save a further £22bn annually which could be used to increase the basic state provision.
Ex-Conservative party adviser Michael Johnson (he worked on the economic competitiveness review in 2007) also argued that it is time to scrap higher-rate tax relief and the PCLS (25 per cent tax-free lump sum) and merge the ISA and pension regimes with a single annual savings allowance of £40,000.
I think this would be a terrible day for UK savers – removing not only the much needed tax incentives to save, but also the fantastic choice and control we all currently have as to how we save.
For me, two planning points jump out straight away:
1. For anyone who has been delaying investing a lump sum using the generous tax relieved regime of personal pensions, then now might be a good time to take advice and cash in on the opportunity.
2. If tax relief is scrapped for personal/employee payments into pensions, then ‘salary sacrifice’ (converting employee payments to employer payments) would be an even more profitable strategy.
H&C will be watching this space to see if this (evil) plan is pursued by the Government.