Chancellor George Osborne has been trying to simplify things for a number of years now. While in the past he has sprung changes on an unsuspecting public, such as the pension freedoms that were introduced a year ago, this time he has consulted the industry and signposted that a change will take place. There is much speculation about the detail of what will happen and the likely timescales, and we will find out more in the March Budget.
One thing that is clear is that the Treasury could be £35 billion better off if it removes tax relief for higher rate tax payers. Top rate tax payers currently receive up to 45% tax relief on contributions to their pension, but commentators believe the Chancellor is looking at a flat rate “savings incentive” of between 25% and 33%.
While this move would simplify tax on pension contributions and is good news for basic rate tax payers – who currently only receive tax relief of 20% on their contributions – some commentators have also estimated this could cost higher rate tax payers up to £8,000 a year in lost relief.
Take advantage before it’s too late
Michelle McGrade, chief investment officer at TD Direct Investing says further simplification is welcome for many, although higher rate tax payers are likely to be worse off. “This is his [Osbourne’s] chance to tidy up the current complexities involved with pensions. It also means higher rate tax payers should be looking at their pensions to see if they can take advantage of the current tax relief scheme before changes are announced.”
It would therefore be wise for you to look at your all your pension pots to see how much more you could make in contributions before 5 April this year. You should include any company defined benefits (DB) scheme in the overall allowance, although you cannot normally top up DB schemes. Also there is the cap on the lifetime allowance to be considered. It is important for you to check how much you are allowed to put in within your tax relief limits. We would suggest you seek some financial advice to assist you with this.
Customers who have some savings available have an opportunity to take action now in order to take advantage of the current rate of pension tax relief and make an additional contribution into their SIPP. Our Pension Calculator can help you work out the additional value you might get at retirement by increasing your contributions now.
For more information about SIPPs go to our SIPP Knowledge Centre.
TD Direct Investing does not provide tax advice. Please note tax treatment depends on the individual circumstances of each customer and may be subject to change in the future.
The investments made within a TD SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. You can normally only access the money from age 55 (57 from 2028).
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