Pension tax grab could threaten retirement for millions
A potential raid on pensions in the upcoming November Budget could cause pension funds to lose billions, threatening businesses and the retirement outcome for millions of Brits.
UK pension funds could suffer a £50bn loss over the next five years if the Treasury decides to slash pension tax reliefs, according to analysis from wealth manager Rathbones.
Savers can contribute up to £60,000 to their pension pot each financial year without being taxed, enticing people to boost their savings without the fear of losing capital.
However, changes to the system are rumoured to be under consideration, including ones favoured by Pensions Minister Torsten Bell before he entered Parliament.
This included slashing the additional rate of tax relief from 40 per cent for higher rate taxpayers, to a flat rate of 25 per cent.
Rathbone’s analysis found that this move would significantly reduce the incentive for people to add to their pension, ultimately leading to a sharp drop in contributions and impacting the UK economy.
Malvee Vaja, financial planner at Rathbones, said: “For individuals planning for retirement, the proposed changes to pension tax relief could significantly lower pension pots, it could even mean rejecting pensions entirely for their retirement saving.”
Pension plans
A cut to tax relief would have a damaging effect on the government push for pension funds to be used to stimulate economic growth and boost returns for savers.
Both the Mansion House Accord, where pension providers agreed to invest a higher percentage of their funds into UK assets, and the Pension Schemes Bill are aimed at increasing investment into pension funds.
But Rathbones argued that the reduction in relief would make less capital available for UK companies, innovation and infrastructure, which have been deemed as critical for the country’s economic outlook.
It could also significantly harm a large number of Brits retirement plans, especially as the frozen income tax threshold, sitting at £12,570, has pushed more people into a higher rate tax bracket, limiting their tax relief.
Oliver Jones, head of asset allocation at Rathbones, said: “Cutting higher rate pension tax relief could have a profound impact on long-term investment in the UK.
“As the government faces mounting fiscal pressures and seeks new sources of revenue, it would do well to remember that while reforming pension tax relief may offer short term savings to the Treasury, the long term consequences could be severe.”