23rd September 2015
Pension contributions from higher and top-rate taxpayers are up by 120% this year compared to last, as wealthy savers seek to make the most of the current system of tax relief before it is too late.
The data from Hargreaves Lansdown, the adviser, comes with a warning that high-earners are running out of time to benefit from pensions tax relief of up to 45% before it is scrapped.
The Treasury’s pension tax relief consultation, launched by the Chancellor George Osborne in the summer Budget on 8 July draws to a close on September 30.
Hargreaves Lansdown head of pensions research Tom McPhail says there is a growing possibility that the current system will be replaced by a new flat rate.
However, he says the possibility of scrapping all upfront tax relief on pensions and turning them into ‘pension ISAs’ now looks increasingly remote.
In the meantime, higher earners are making the most of the marginal rate tax reliefs while they still can. Based on analysis of Hargreaves Lansdown’s clients:
Contributions from higher and top-rate taxpayers are up 61% since the Summer Budget (8 July 2015), compared to the same period last year.
So far this tax year, contributions from higher and top-rate taxpayers are 120% up on last tax year.
McPhail says: “The game is up for higher rate tax relief; higher earners may feel that’s unfair but the Chancellor needs to balance the books and where else is he going to go but to the people who have the most money.
“Savvy investors are making the most of these earnings related top-ups while they still can.”
In a separate survey of over 2,000 investors Hargreaves Lansdown found that a flat rate incentive would have to be set at a rate of 50% to be effective; this means getting a £1 government top up for every £2 paid into a pension.
The study revealed that many higher earners could accept a flat rate system as fair, even if it cut their tax breaks.
McPhail adds: “People want a system which is simple, fair to all, which rewards responsible savers and is sustainable in the long term. This means changes to tax relief system should also involve scrapping much of the red tape and restrictive bureaucracy which has bedevilled and bewildered pension savers for years.”
“Any move to scrap the up-front incentive altogether could have disastrous consequences; investors were very clear that they prefer the ‘bird in the hand’; not surprisingly, they don’t trust future governments to honour promises made today. The idea of a ‘pension ISA’ is a non-starter.”
“There is also an interesting challenge to the government in building a consensus for any reforms. Investors are very clear that they want a stable a long-lasting pension system. Given the upheavals in the Houses of Parliament in the past 6 months, this may not come easily.”