There has been an increase in people making contributions into their pensions ahead of possible changes to tax relief in the Autumn Budget, financial advisers have told The i Paper.
Savers get tax relief when they pay into a pension. There is tax relief of 20 per cent for basic rate-payers – those earning under £50,270 – with higher and additional rate taxpayers able to get more back.
But speculation is intensifying that higher and additional rate tax relief could be scaled back, with experts saying there has been a rise in both contributions and tax planning enquiries over the past few weeks.
square PENSIONS AND RETIREMENT MappedThe areas where life expectancy is just a few years above state pension age of 66
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There are fears that the Chancellor may target pensions as a way to raise revenue without breaking Labour’s pledge not to increase income tax, national insurance, or VAT.
And so some people are opting to pay more into pensions now, to take advantage of the relief while it still stands.
Rowan Morrow-McDade, tax director at Alexander & Co Chartered Accountants, said: “We’ve seen a surge of client making pension contributions now, ahead of any potential pension changes.
“There are rumours that she will cut the ability for higher or additional rate taxpayers to get relief on their contributions, so people are choosing to move now.”
Contributors to pensions currently benefit from tax relief at a “marginal rate”, meaning basic rate taxpayers get 20 per cent, higher-rate taxpayers 40 per cent and additional-rate taxpayers 45 per cent.
Pension tax relief has long been seen as vulnerable to reform. Cuts to the tax relief that higher earners enjoy on pension contributions are “inevitable” in the next three to four years, Pensions Minister Guy Opperman said earlier this year.
Greg Moss, director of Eleven 2 financial planning, said: “We have a lot of higher earners who are using pension contributions to get their income under £100,000 to avoid marginal income tax cliff edges.
“Any change to higher rate relief or salary sacrifice could completely upend their plans, so they’ve been bringing forward contributions they were planning to make over this and the next few tax years, where the numbers stack up.”
Independent financial adviser David Stirling, said one of his clients was advised this week by their accountant to make a lump sum contribution to their self-invested personal pension (SIPP).
“This is amid speculation to changes coming to pension tax relief in the upcoming Budget, and while I understand the desire to be pre-emptive, it’s important to remember that policy details remain unclear until Budget days.”
Although Reeves did not touch pension tax relief in last year’s Budget despite speculation she would do so, some believe her options are now more limited.
Charlotte Sallabank, tax partner at law firm Katten Muchin Rosenman LLP, said cutting tax relief on pensions “would be a lucrative move and more subtle than increasing tax rates.”
Others are less sure. Jason Hollands of Evelyn Partners pointed out that while scrapping higher-rate relief might raise money, it would be politically difficult, particularly given the generous pension schemes enjoyed by many public sector workers.
He said: “Doing so would not be straightforward to implement as well as being deeply unpopular, especially with parts of the public sector like the medical profession.
“A more straightforward option for a Government wanting to reduce the cost to the Treasury of pension tax reliefs would be cut the annual allowance [the £60,000 limit you can save into your pension each tax year without incurring a tax charge] rather than reduce reliefs to basic rate tax or some other flat rate.”
Should you put more in your pension in case of tax changes
Generally, financial advisers caution against making decisions based on potential rule changes.
“Rushed decisions can backfire and it’s important to look at long-term planning and annual allowance limits, not just the short-term headlines,” explained Mr Stirling.
Experts say that any changes to pension tax rules would likely not come in immediately.
“I believe any change would be forward looking and not retrospective on benefits already accrued. Additionally, I do not see any change being applied immediately,” said Alex Pugh, a financial planner at Saltus.
Having said that, advisers say if you can afford to add more to your pension early in the tax year and are concerned, there are no significant downsides to doing so.
“If you’re a higher rate tax payer, you’re planning on making pension contributions anyway, and you can afford it, there’s no major downside to going early in the tax year if you’re worried about the Budget,” added Mr Moss.
One option that has been touted is introducing a flat rate of tax relief. For example, the Government could set this flat rate at 30 per cent – or 25 per cent.
Setting a flat rate above the current 20 per cent basic rate would benefit lower earners who are increasing the amounts they receive into their pensions at the expense of higher earners who would have higher tax bills to pay.
It would mean higher rate payers will pay an effective 10 per cent tax charge on their pension.
What other moves are pension savers making?
Beyond contributions, some retirees are also choosing to take their 25 per cent tax-free pension lump sums now, despite no official announcement suggesting these are under threat.
The pension commencement lump sum (PCLS) allows people to withdraw up to 25 per cent of their pension pot tax-free, currently capped at £268,275.
Mr Morrow-McDade said: “We’ve had a couple of clients cash in their 25 per cent tax free lump sum, again on the basis that Reeves might cut this.”
Lisa Caplan, director of Charles Stanley Direct Advice and Guidance, said she has also seen more clients discussing early withdrawals.
She said: “I have certainly been speaking to clients who are considering the, possibly diminishing, future of their tax-free retirement cash.”
The UK Government has been contacted for comment.
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