“Don’t penalise older savers to chase young voters” – Tilney comments on a potential raid on pensions tax relief

With the Chancellor’s first Autumn budget just weeks away, speculation is already mounting that embattled Chancellor Phillip Hammond will seek to produce a ‘big, bold budget’ in order to try an tackle the surge in support for Labour from younger voters.

A potential way of doing this is might be to offer tax cuts targeted at younger voters, for example by reducing National Insurance contributions. Speculation is rife that to fund this, the Chancellor may choose to raid pensions tax relief – and as Gary Smith, chartered financial planner at Tilney suggests below, this is going to be tricky to implement without having wider implications for the public purse.

“Pensions tax relief has been an issue for the recent Chancellors, with George Osborne opening a consultation on its future back in 2014. Whilst no significant changes to tax relief resulted from the consultation, with Osborne backing away from a radical shake-up on the basis the timing wasn’t right, it has felt like higher rate pension tax reliefs have been on borrowed time ever since.

“The key issue is the cost of pensions tax relief to the Exchequer, with recent data suggesting the cost of this has exceeded £50bn for the first time, resulting from more and more people paying into pensions through Work Place pension schemes as auto-enrolment has gathered pace. The bulk of the tax relief (circa 70%) goes to higher or additional rate taxpayers. This cost to the Exchequer is unsustainable and will need to be addressed.

“The big question is how you address the tax relief issue. One of the previous suggestions was to limit tax relief to say 20%, with no higher or additional rate tax relief. The only issue with this is that this would require a change to Tax legislation as higher and additional rate tax relief is obtained (for the majority) through their annual tax return submissions. Furthermore, it is even more complicated for members of Public Sector Pension schemes (NHS, Teachers etc.) as their pension contributions are deducted from their income before Income Tax is calculated, effectively providing them with higher or additional rate tax relief immediately. How could a flat rate tax relief be applied to these individuals?

“I can only assume that if, Mr Hammond does opt to reduce tax relief for older savers to reduce NI for young people, then this would be by reducing the Annual Allowance (currently £40,000) for those above a certain age to, for example, say £20,000. This would restrict the amount that they could pay into pensions, thus reducing the tax relief available to them. However, this could again create an issue for the Chancellor as senior staff in public sector schemes (such as NHS staff and Head Teachers) could opt to retire early to avoid penal tax charges that would be applied on contributions exceeding £20,000 per tax-year.

“The other issue is that many young people simply can’t afford to save much into pensions in their early years, as they use their income to fund a property purchase and mortgage costs, raise a family, repay student loans etc. It is typical for people to increase their pensions funding in later years once they have the excess financial resources to do so, but any reduction to how much can be contributed could restrict this type of planning.

“Ultimately, I do feel that changes to the pension tax relief system are inevitable at some point, but there are other ways to achieve this without penalising older savers in favour of young people. For example, the introduction of a flat rate of relief for all at 25% or 30% would provide an additional boost to contributions for basic rate taxpayers and while pensions would no longer be as generous for higher rate taxpayers, their funds could still end up being boosted if all of the relief was paid into the pension rather than partially through a reduce tax bill.

“As always, it is vital to discuss your financial plan with your dedicated planner to ensure you have maximised your allowances and to understand how any changes may affect you.”

To discuss this or any other financial planning topic please contact Gary Smith on 0191 731 7642/ gary.smith@tilney.co.uk