A system to encourage basic-rate taxpayers to start savingby Craig Mackinlay / March 1, 2016 / Leave a comment
Read more: Imagine what we could do if we got pensions right
The last 20 years have seen tumultuous changes to pensions—state, public sector and private sector ones alike. Yet more reform is likely, in the area of tax relief. From my work as both a chartered accountant and chartered tax adviser, I know that our tax code is already too complicated, running to nearly 20,000 pages. It’s best to avoid complicating it further.
The tinkering started in 1997, when Gordon Brown stopped pension schemes from reclaiming tax credit on dividends. A 2006 paper for the Institute of Actuaries estimated that this move wiped £150bn from the value of retirement funds. It was the beginning of the end for private-sector final salary schemes, which companies now deem too costly.
Recent changes have affected higher-rate taxpayers more than others. Reductions since 2010 to the lifetime allowance (the amount you can accumulate in pension funds without incurring extra tax) and now the annual allowance (the amount that you can put each year and still get tax relief) may save the public purse billions of pounds but they have made the system more opaque and hard to understand. However, restrictions in last July’s Budget on contributions by those earning £150,000 and above are to be balanced by a relaxation of the inheritance tax rules on family homes.
All this flux has left those heading for retirement wondering what the best way to secure their future is. It’s unsurprising that some have stashed their money in ISAs or relied on buy-to-let property instead, especially as they can withdraw their capital at any time. But the 2015 Budget will discourage people from taking the last route by cracking down on mortgage interest tax relief and imposing a stamp duty surcharge on the purchase of buy-to-let properties.
Higher-rate taxpayers make pension contributions for tax relief, rather than income in retirement; they will draw on their other savings and investments in old age. Tax relief on pension contributions will most likely approach £35bn in the financial year 2015-16. That figure rises to £50bn a year when you factor in salary sacrifice arrangements and their impact on National Insurance Contributions (NIC). These sums could…