The annual deadline for investing in your pension this tax year is fast approaching. This means that, if you want to make the most of your pension allowance for the 2019/20 tax year, you have until April 5th to do so.
This deadline is shortly after the government’s upcoming budget, scheduled this year for March 11th. A recurring conversation in the run-up to recent budgets has been the reduction of the higher rate of pension tax relief. This year is no different, as recently appointed Chancellor of the Exchequer Rishi Sunak attempts to balance government spending.
It’s a busy time of the year for investors, with many looking to maximise their allowances and their access to tax relief on contributions for their future. If you need advice on how to make the most of your financial situation before the tax year draws to a close, get in touch with one of our investment advisors today.
What is pension tax relief?
One of the key ways in which the government encourages people to save for their retirement is through pension tax relief. Tied to how much you earn – and subsequently pay in income tax – pension tax relief gives you either 20%, 40% or 45% tax relief on deposits made into your pension plan.
In this system, someone earning £35,000 a year saving £6,000 gross into their pension would get a tax relief of £1,200. Someone earning over the 40% tax threshold with a salary of, say, £90,000, would get tax relief of £2,400 in tax relief on that £6,000 gross deposit.
This tax benefit runs at a huge cost to the government. According to the Guardian, the total loss when various tax reliefs are added up equates to nearly £40 billion. This is £11 billion more than the defence budget, for example, a significant outlay that many incumbent chancellors have cited as a problem for consideration. The latest in the line of those reportedly looking into pension tax benefits is Conservative Chancellor of the Exchequer, Rishi Sunak, who is set to announce the party’s upcoming budget on March 11th.
What could change?
There has been some speculation that Sunak was looking into removing the 40% tax relief for higher earners, a move that would save the government a whopping £10 billion. The option would be to equalise tax relief at 20% or meet in the middle at 30%. Either way, higher earners would lose out in the latest “raid on pensions” debate to rear its head.
This is not a new conversation. Philip Hammond described pension tax relief as “eye-wateringly expensive” and mooted scrapping it, as did George Osborne, yet both were shot down by opposition from within the Conservative Party. It is not unlikely that any revival of this policy will also be met with opposition, but the budget announcement due on the 11th March will give us a better idea of the party’s plans.
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Whether or not any policy affecting pensions is actioned in the upcoming budget remains to be seen. Making the most of your pension allowance by the end of the tax year, though, is something every investor should be thinking about. What this back and forth from Sunak has highlighted is that policy conversations regarding tax relief are recurring and no benefit is safe from review.
What can you do?
Any government reform to pensions can be surprisingly impactful given the gravity of what is at stake for those with savings. Couple this with the fact that no one can be sure whether certain tax thresholds will change and it is important that investors get the most out of the current situation.
Our position is that the current pension incentives are favourable and that savers should be fully exploiting them. What this means in real terms is maximising your annual allowance with a lump sum investment or increasing your monthly contributions going forward.
The current system of tax reliefs may well live on through the upcoming budget, but it is not something savers should take for granted as they map out their financial plans for the future. As such, it would be wise to ensure you are getting as much of a tax break as you can afford by utilising the allowance you currently have. For those that have already maxed out their allowance for the year, ‘carry forward’ rules allow savers to utilise any unused allowances from the previous three tax years.
Get proactive with your pension
Most people understand the importance of saving for their futures. Putting away as much as possible for retirement can ensure that your standard of living does not drop dramatically once you stop working. Making the most of tax benefits, contributing as much as you can early and being smart about where you put your capital can all help you meet your retirement goals.
If the 40% rate of pension tax relief is cut in half, it may suit some people to invest in an ISA rather than a pension. Moneyfarm’s personal investment portfolios are designed around you, managed by experts and allow you to keep an eye on your performance at the push of a button.
If you’d like to discuss how to make the most of your pension allowance (even your lifetime allowance), or your other options for saving, do not hesitate to get in touch with one of our investment advisors directly. Call 0800 433 4574 or book a call today.