Opinion: Is the love affair with pensions tax relief over?

Energy Voice

The UK’s pension population’s love affair with pensions tax relief started when the Finance Act 1921 introduced tax relief for contributions to occupational pensions. Now, 95 years later, are we about to see the end of the traditional way in which tax relief is given on pension contributions?

In July 2015, HMRC issued its document, ‘Strengthening the incentive to save: a consultation on pensions tax relief’. The Treasury have already confirmed that they are considering the responses to the consultation and that they will respond on the 16 March 2016, Budget day.

With an annual pensions tax relief bill of circa £34 billion, there is general speculation that the Treasury will introduce measures that will restrict tax relief on pension contributions, with a flat rate of 25-33% on pension tax relief being a likely contender. Whilst an announcement is expected on the 16 March, when any changes will come into force is unknown.

April 2015 saw the introduction of increased flexibility being granted to the way in which we access our pensions and how we distribute pension assets on our death. However, as we approach the end of the tax year, we cannot rule out seeing major changes in the way in which tax relief is granted on our pension contributions, as well as further changes to the carry forward rules or the annual allowance.

Members wishing to maximise pension contributions need to be taking action now to assess any carry forward options available to them, especially those who have benefited from an additional allowance in this tax year as a result of the change in the pension input period rules. Our clients who took advice to make pension contributions early in the tax year, prior to the Summer Budget, benefited in this way.

The proposed restriction on pension contribution relief may just be a start of a range of restrictions over a period of time. Whilst now the emphasis may be on maximising pension contributions whilst individuals can, it is also the time to consider other tax-efficient options for ‘retirement’ planning, such as ISA’s, venture capital trusts, and enterprise investment schemes, to supplement existing retirement provision.

We appreciate each individual’s situation is different, higher-rate taxpayers looking to contribute prior to the Budget on 16 March may need to consider this position further; conversely, basic rate or non-taxpayers may wish to consider delaying making a contribution until after any Budget announcements are made.

Justin Grant, is a Wealth Management Consultant with Mattioli Woods