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You may have noticed some recent news headlines mentioning a planned “pensions tax raid” by the UK government. Such language is very alarmist and, therefore, likely to attract readers. Yet it is vital to always base decisions about retirement planning on facts and informed forecasts – rather than make impulsive choices out of fear or panic.
In this article, our financial planning team at Cedar House examines whether there are, indeed, plans for a “pensions tax raid”. If so, we explore what form this could take and what this could mean for your pension plan.
We hope you find this content useful. If you’d like to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
The pensions tax raid
Towards the end of June 2021, media outlets started publishing stories about the Government planning to divert public money set aside for pensions into the Long Term Asset Fund (LTAF) – a fund announced in November 2020 to invest more money into UK infrastructure projects.
It is not exactly clear where the source of the story comes from. However, the Mail on Sunday reported that industry sources had claimed that UK Government officials had met privately with senior pensions industry figures to discuss how a portion of workplace pension schemes could be apportioned to the LTAF – partly to help repay the public debt racked up by COVID-19.
The Government, as of yet, has not said much to substantiate or debunk this – although they have been quick to state that the “triple lock” on state pension (which ensures that income rises with inflation and wages) will not be scrapped. Rather, the ideas apparently being discussed in Whitehall include:
- Lowering the lifetime allowance.
- Introducing a flat rate of tax relief on pension contributions.
- Taxing employer contributions on workplace pensions.
The latter appears to be the one currently most under consideration, with plans possibly to be announced in the Autumn Statement. This is partly because changing the state pension would involve huge political risk for the Government, since older people are more likely to vote – and also cast it for the Conservative Party. Changing workplace pensions, however, affects the broad workforce – many of whom are not even aware of what is happening with their workplace pension. Moreover, the move could also be successfully branded by the Government as an “improvement” on the range of pension investments that employees can access (e.g. illiquid assets like infrastructure and private equity). One possibility is that employees could end up channelling money into the LTAF by selecting the ‘default’ investment option in their workplace pension. This would allow them to opt out, but in practice many people would sign up without knowing what they are investing in.
What can you do?
Until the Government announces any firm plans (unlikely until the Autumn), it is impossible to fully predict whether a “pensions tax raid” will transpire – and what form it might take. However, this does not mean that savers should do nothing and simply “wait and see”.
As mentioned, one possibility is that tax relief on pension contributions could move from your rate of income tax to a flat rate – say, 30%. This could be welcome news for those on the Basic Rate (20% relief). For people on the Higher and Additional Rates, however, this would be a big reduction. In light of this, you may want to discuss with your financial adviser about making the most of your tax reliefs now (if you can afford it) – whilst they are still available.
Another potential change could be a reduction in the lifetime allowance – perhaps to £800,000, down from £1,073,100 in 2021-22. One option here could be to consider lowering/stopping your pension contributions (if your pension is near these figures), and divert into other tax-efficient savings vehicles instead. A natural contender would be an ISA which you can fill up to £20,000 per tax year and generate tax-free interest, capital gains and dividends. There is also no overall cap on how much you can save into it, either.
Finally, another idea in the press is that a portion of your employer’s pension contributions – set at 3% of your salary, at minimum – could be taxed. This could lead to less being put into your workplace pension each month. Whilst you would not be able to stop this from happening, you could get ahead of it by planning a negotiated rise in your employer’s pension contributions. Another option would be to increase your own contributions or to consider opening a personal pension scheme alongside your workplace scheme, with help from a financial adviser. This may help you access more investment opportunities and lower fees to help make up for some of the potential loss from any future lower employer contributions.
Recent history has shown that it is unwise to try and predict what the Government will do when it comes to taxes and pensions. However, there is only a limited range of options open when it comes to potential reform. It can help savers to be aware of them and have contingency plans in place should any of them ever be implemented.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or email@example.com