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What a pensions overhaul could mean for you and how to stay one step ahead

Calls by an influential government body to abolish the Lifetime ISA and abandon the current pension tax relief model in favour of a universal flat rate could radically change the pensions landscape in the UK.

The Treasury Select Committee’s annual report on household finances has recommended Chancellor Philip Hammond makes drastic reforms to the UK’s pensions and savings framework.

The committee has suggested replacing the lifetime allowance with a lower top annual allowance, and introducing new flat-rate tax relief instead of the tiered model savers currently benefit from.

The report also encouraged the government to pull self-employed workers into auto-enrollment and to abolish the Lifetime ISA.

Tax relief

Designed to encourage everyone to save for their future, savers can currently get tax relief on their pension contributions relative to their income tax band.  Basic rate taxpayers get 20% tax relief, higher rate taxpayers get 40%, and additional rate taxpayers get 45% tax relief on their pension contributions.

For example, if you’re charged the basic tax rate, you’ll only need to pay £8,000 into your pension for a £10,000 contribution – the basic rate tax relief is automatically added to your pension investments.

If you’re a higher rate or additional rate taxpayer, you can claim back even more through your annual tax return.

This is equivalent to a higher rate taxpayer getting an extra £2,000 on top of the £2,000 that is automatically added to their pension, and an additional rate taxpayer getting an extra £2,500. The additional relief is reflected in your tax band, however, and isn’t processed like your basic rate tax relief.

This UK’s tax relief scheme can make a real difference to the amount you save for your retirement income over the long-run.

However, tax relief isn’t understood by many, which means it isn’t working to encourage people to save, and this is why the Treasury Select Committee has suggested it be looked into. Baroness Altman told the Committee: “My preference would be for everybody to get the same incentive for the same contribution.”

She also suggested that “it would be really helpful and more effective if we were able to badge tax relief as a Government bonus on your pension or the Government contribution to your pension.”

There’s been no discussion of what this flat rate of relief might look like, but based on the discussion by the committee it seems that high rate and additional rate taxpayers will receive less than they currently receive.

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The annual allowance

The select committee has also suggested scrapping the lifetime allowance, currently at £1.03 million for the 2018/19 tax year, in favour of a lower annual allowance and flat rate of tax relief.

Currently, savers can put their annual salary or £40,000, whichever is lower, into their pension each year to benefit from the generous tax relief.

This includes contributions from you, your employer and your tax relief.

You can keep putting money into your pension, you’ll just be charged a fee. The charge for exceeding your annual allowance is set at your income tax band. This acts as if the excess amount were added to your other earnings.

If you earn in excess of £150,000 a year, this allowance is tapered. Every £2 of additional income over £150,000 will reduce the annual allowance by £1. The lowest this can go to is £10,000 for anyone with adjusted income of £210,000 or above.  

What should you do now?

Nobody has a crystal ball and we don’t know whether Chancellor Philip Hammond will shake up the pensions environment in the near future, but we can assume that he’s looking at the Treasury Select Committee’s proposals.

Below we’ve given you three tips to help make the most of the benefits available to you today, and get a step closer to having the retirement you deserve.

  1. Make the most of your annual allowance

Pay as much as you can into your pension each year to make the most of your annual allowance. You can either increase your monthly direct debit, or make a lump-sum investment if you want to use your full entitlement but are more uncertain about future regulation changes.

  1. Carry forward any unused annual allowance

If you want to contribute more than your annual allowance in a tax year, you can usually carry forward up to three years of unused allowance before you start withdrawing from your pension savings. This will allow you to catch-up on any conditions you may have missed and reap the tax benefits at the same time.

  1. Make the most of your tax relief

If you’re a higher or additional rate taxpayer, make sure you claim back any additional relief from HMRC above the basic rate. You’ll automatically get 20% from your pension provider, but this could increase to  40% or 45%.

For more information on how Moneyfarm can help you with your pension visit our pension page, or book a call with one of our investment consultant.

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