Pension Annual Allowance most likely target in the Budget

AJ Bell believes a cut to the pension Annual Allowance is the most likely outcome in the Budget, rather than more radical reform of the pension tax relief rules.
24 October 2017

AJ Bell would also like to see:

  • The Annual Allowance taper scrapped

  • The Lifetime Allowance doubled

  • Tax free pension withdrawals to fund long term care

  • The annual contribution limit for non-taxpayers aligned with Junior ISAs

Tom Selby, senior analyst at AJ Bell, comments:

Cut to the pension Annual Allowance most likely

“With the Chancellor apparently determined to put intergenerational redistribution front-and-centre of his first post-election Budget speech, pension tax relief looks like an obvious target for cuts.

“However, with Brexit straining Government resources and a weakened Theresa May undoubtedly wary of stirring up a hornet’s nest among her back benchers, radical reform seems extremely unlikely.

“Politically, something that directly attacks higher-rate tax payers – such as scrapping higher rate relief or introducing a flat rate - would be very difficult to get through Parliament, particularly as these voters represent the Conservative Party’s core support.

“On a practical level, changing higher-rate tax relief is anything but simple when you factor in occupational and defined benefit pensions. The last thing we need is something that is invented in the Treasury, with little practical knowledge of how it will be implemented and no evidence that it will solve the problem it sets out to address.

“There are already two mechanisms for controlling the cost of tax relief – the Annual Allowance and the Lifetime Allowance.  The Government has already confirmed that the Lifetime Allowance will increase in line with inflation as previously announced. Paring this back further would send a dangerous anti-saving message and create extra complexity, the last thing the pensions system needs.

“That leaves the Annual Allowance and a cut from the current level of £40,000 to £20,000 would align it with the annual ISA allowance. The main people who would be hit by this would be older, wealthier workers and the savings could be used to fund giveaways to younger voters.”

The Annual Allowance taper scrapped

“If the Annual Allowance was reduced to £20,000, the hideously complex annual allowance taper for high earners would seem an unnecessary complication and could be scrapped.  However, with the Chancellor in desperate need of cost savings it seems more likely that the income trigger for the taper will be reduced further to catch more high earners and restrict their pension contributions further.”

The Lifetime Allowance doubled

“Many see the Lifetime Allowance as an unnecessary tax on investment growth.  If it hadn’t been cut and increased in line with inflation it would be over £2 million today.  If the Government does decide to control the cost of pension tax relief by reducing the Annual Allowance the Lifetime Allowance could be doubled to get it back to where it would be if it hadn’t been consistently salami sliced away by previous Chancellors.  This would also enable the complicated rules around protected allowances for individuals to be removed.

“The Government could offset any costs associated with this by reviewing the generous factoring treatment of Defined Benefit pensions which means, at the moment, these savers are able to build up significantly higher pension entitlements than their Defined Contribution counterparts without being caught by the lifetime allowance.”

Tax free pension withdrawals to fund long term care

“The funding of long term care is one of the biggest societal issues we face today.  Enabling pension withdrawals to be made tax free in order to fund long term care would provide a significant incentive for people to save via pensions, in the knowledge that should they become ill their hard earned savings will go as far as possible to funding the care they need.”

The annual contribution limit for non-taxpayers aligned with Junior ISAs

“Non-taxpayers can contribute a maximum of £3,600 (including tax relief) a year to pensions but this figure has not increased for years.  Increasing it so it is aligned with the Junior ISA allowance of £4,080 and inflation linked would provide a small but important boost for non-taxpayers.”

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