This has been fuelled by the announcement this week that the government has decided to scrap its plans to allow people to sell existing annuity policies on a secondary market. The reason for the U-turn according to Simon Kirby, the economic secretary to the Treasury, is that it is not possible to guarantee that consumers will get good value for money from the secondary market. But as well as preventing those who wanted to sell poor value annuities from doing so, the decision will also create a £485 million shortfall for the Treasury in 2018; which could hit people’s pockets in other ways as they seek to recoup it.
This along with Theresa May’s commitment at the recent Conservative Party Conference to support working people leads to a view that further changes to pension tax relief are likely.
The current system provides pension tax relief based on the level of income tax you are paying at the point you make a contribution to your pension. So if you are a basic rate tax payer you will receive a top-up of 20%, if you are a higher rate tax payer you will receive tax relief at either 40% or 45% dependent on your earnings level.
Current tax relief system
Source: TD Direct Investing
What are the options the Government might be considering?
One option is to weight tax relief in favour of the young to make pensions more attractive to the younger investor. Young savers would receive a greater level of tax relief than older savers (interestingly before 2006 it used to work the other way round!). An interpretation of how this might work is that the government would provide tax relief on contributions calculated at 100% less the person’s age. So an individual aged 25 contributing £100 would receive an additional £75 from the government. Whereas a 50 year old would only receive a top-up of £50 on the same amount contributed.
Ros Altmann, former Pensions Minister, thinks that an alternative option of a single flat rate of tax relief could be on the cards where everyone receives the same level of top-up no matter how much they earn and regardless of age. There’s no indication of what the flat rate is likely to be. It could be more than the current basic rate of 20% but most likely will be lower than the current rates for higher rate tax payers.
Either way the higher rate tax relief available on pension contributions today could be scrapped. Ellen Bruno, Head of Pension Product for TD Direct Investing says: “everyone should be considering their pension and how much they have for retirement. In particular for higher rate tax payers, they could think about contributing ahead of any change to make the most of the extra relief available.”
Find out how you can contribute to your SIPP today.
The investments made within a TD SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55.
Prior to making any decision about the suitability of a TD SIPP, we recommend that you seek the advice of a suitably qualified financial adviser.
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