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Budget predictions; stop tinkering with our pension system Osborne!

With just less than two weeks to go until Budget Day, one of the greatest hopes is that George Osborne will refrain from tinkering with the UK pension system, which is already going through the biggest reform in centuries. Our Employee Benefits team believe that further pension changes are inevitable and give their six pension Budget predictions for the 16th March.

Flat rate tax relief

Osborne has proposed a flat rate tax relief on pensions, which could be anywhere between 25% and 33%. Although this will be welcome news for  basic rate tax payers, higher earners are likely to lose out from this. Osborne needs to clarify when this would happen, and employers will need to prepare for the upheaval this could have on their current practice.

Abolition of tapered allowance

The introduction of flat rate tax relief may override tapered annual allowance. From April 2016, the annual allowance for those earning above £150,000 is to be reduced on a tapering basis so that it reduces to £10,000 for those earning above £210,000. A flat annual allowance would make it easier to understand for consumers as well as advisers. 

Tax free cash lump sums

There have been murmurings that Osborne may scrap the option to withdraw up to 25% of your pension as a tax-free lump sum on retirement. This could potentially have more of an impact on savings than the introduction of the flat rate tax relief. It may drive people down the ISA route, which could be to the detriment of retirement savings: ISAs are not perceived as a long-term saving option by lots of people and immediate access to this money can be too tempting for many to resist. 

Pension ISAs

Osborne is unlikely to go down the pension ISA route – if he did, it would be the worst option out of all the proposed changes. The idea behind this concerning rumour is that pensions will become an ISA style system, whereby income tax would be paid on the contributions, but it would be tax-free when taken out. This is not likely to be seen as a long-term savings vehicle, and is particularly concerning for younger generations, as they won’t be incentivised to put in as much in their pension savings. This type of system would also be horribly complex for employers and dissuade them from encouraging staff to save into a pension.

Lifetime Allowance (LTA)

The Government has underestimated the amount of people who will be affected by the reduction in the lifetime allowance. We know that Osborne will be reducing this to £1 million, but the worry is that this could be cut further to £750,000, which would have detrimental effects on people's savings habits. They would not be incentivised to save into a pension and subsequently – several years down the line – this would result in people becoming more of a burden on the state.

Pension carry forward

Pension carry forward is a rule that allows an individual to make use of any annual pension allowance that may not have been used during the three previous tax years once the allowance for the current tax year has been exhausted, meaning some higher earners could contribute up to £180,000 to a pension and receive up to £81,000 tax relief in the current tax year. We may see that the pensions carry forward is abolished all together and higher earners would need to look for alternative ways to boost their retirement savings.

Date Issued: 03.03.16

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

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Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.