Big cuts to pensions higher rate relief from 2014. Advisers attack the change.

5th December 2012

Better off pension investors and entrepreneurs will see the maximum amount they can save into a pension cut back significantly from 2014.

Pension investors will be able to invest £40,000 annually rather than the current £50,000. The lifetime limit – the amount you can save into a pension before being hit with tax penalties – will also be cut to £1.25 million from the current £1.5million. Mindful Money reported on speculation that the limits would change last week.  

The move will affect a relatively small number of well paid directors and entrepreneurs. However many pension experts say it can send exactly the wrong signal, and risks seeing the wealthy lose faith in the pension system just when the Government needs them onside to bring in a new nationwide workplace pension reform known as auto-enrolment.

Many business people also use the years close to retirement to turbo-charge their pension. Their ability to do so will be restricted significantly from 2014.

At the same time, under current rules you may use not just this year's relief, but unused relief from three previous years so in theory you could receive relief of up to £200,000, under a system known as carry forward. It is not clear exactly how carry forward will be affected by the move and there will probably be more details in the next Budget.

However, provided no measures are introduced to stop people taking advantage of current reliefs – a strategy known as forestalling – then people with significant amount of money to invest can still take advantage of current relatively generous rules.

It is also likely that those who have already garnered a pension pot above £1.25 million by 2014 will be able to apply for a form of protection where they don't contribute any more to a pension but their overall pot is protected from the new tax measures. Some pension experts say you may have to apply for this protection some time next year.  

The move makes sense in budget terms for the UK. Michael Johnson, a research fellow with think tank the Centre of Policy Studies, called on the Government to scrap the tax altogether, as reported last week's Telegraph. Johnson said the tax was costing the Government £7 billion every year.

Although the eventual pension payments are taxed when a pension income is taken after retirement, this is usually at the basic rate, and a good financial adviser can help you plan to minimise the tax take. 

Perhaps unsurprisingly, the move has not proved popular among financial advisers and pension consultants.

Nigel Green, chief executive of global IFA, de Vere Group, has criticised the measure as a "tax on the future to pay for the present".

Mr Green also said it could be detrimental to economic growth by discouraging high earners from spending.

"Lowering the maximum annual tax-exempt pension contribution to £40,000 from 2014/15 could discourage higher earners from spending, which would be detrimental to economic growth.  Reducing pension wealth, which accounts for more than half the accumulated wealth of the UK's better off households, could have far-reaching, unintended, negative implications.

"In addition, Mr Osborne's cash-grabbing raid does not only affect the super-rich.  It will hit middle income earners who increase contributions to their pension pot later in life, as well as owners of enterprises, which are vital for the UK's economic growth.  High rates of personal tax are damaging to business as they reduce a company's ability to grow, meaning lower job creation."

Buck Consultants managing director Fraser Smart has also been critical. He said: "Making such a big change just three years after the last changes to pension saving limits is extremely poor policy making and one we will end up paying the price for over the next 60 to 70 years. Reducing pensions tax relief may bring in £1bn in tax revenue in the short term but coming in just two weeks after the Department for Work and Pensions launched its ‘Reinvigorating Pensions' paper to try to get people to save more, the timing couldn't be worse. The Government needs some joined up thinking if we are to ensure that future generations have enough savings to avoid falling back on the State.

"Reducing the lifetime allowance to £1.25million because 98 per cent of people are saving less is more or less saying the current savings situation Britain is in is alright – when it clearly isn't. People need to save more if they are to financially meet their expectations in retirement," he said.  

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