With lots of speculation over the last 12 months, we were all expecting major changes to be announced in this month’s budget with regards to pension tax relief.
It was suggested that the tax free lump sum was going to be removed. We were also told that the ability to claim higher rate tax relief was going to be withdrawn. Other reports said that the whole idea of having tax relief on the way in, with tax payable when you draw your pension would be withdrawn. It was to be replaced with what had been termed a pension ISA.
However, reports over the weekend confirmed that the Government has had a change of heart and all plans for further pension reform have been dropped.
Why the change of heart?
The proposed changes would have created short term savings for the government, but the long term tax revenue would fall. As we are living in a time where the government is committed to clearing the deficit, the prospect of reducing the tax relief on pension contributions would be attractive.
However, its only two years since we had the introduction of Pension Freedoms which mean that no-one has to buy an annuity if they do not want to do so. We are also working through the auto enrolment process, under which many more people will now be able to benefit from a private pension in their retirement. There is a new found confidence in pensions which the planned changes could have dampened.
We do not know if this change of mind is a long term view or if this is just a short term reprieve and we will be talking about the same issues next year. Given the uncertainty generated by the proposals, we are still advising our clients to make pension contributions sooner rather than later if they are higher rate taxpayers.
Tait Walker Wealth Management is a trading style of Tait Walker Financial Services Limited who is authorised and regulated by the Financial Conduct Authority.