No change to pensions tax relief, but it has been studied!18 November 2022
First comprehensively studied in 2016 by the then Chancellor, George Osborne, pensions tax relief might have made it into the Autumn Statement on 17 November 2022.
Higher rate tax relief has been a welcome allowance for many higher rate taxpayers and many thought that our current Chancellor, Jeremy Hunt MP, might have had this higher-rate relief in his sights to help towards the financial challenges that he faces in 'balancing the books' of the UK, possibly introducing a flat tax relief rate for all. He made no changes, much to the relief of those in the accumulation phase of their retirement plans.
For reference, HMRC reported that gross pensions tax relief in 2019-2020 was projected to be £41.3bn, a significant amount. More here: https://www.ftadviser.com/pensions/2021/10/01/pension-tax-relief-cost-hits-42bn/
You can see that this is no small amount. So how valuable is saving into a pension?
As a first point, it's important that those who are contributing into pensions, or are thinking of doing so, understand how a pension works. In our experience of enquiries, knowledge of the ins and outs of the UK pension system is – entirely understandably – variable. It's not the most riveting of topics, but vital, nonetheless.
There is a carrot and stick position going on here, because pension savings are a deferred tax system. Based on current legislation, you gain tax relief on the way in, effectively tax-free growth during accumulation, tax efficient death benefits (especially before age 75), tax free cash (usually 25%) on exit, and then the balance is subject to income tax at your highest marginal rate. The income tax bands, and personal allowance, remain unchanged in retirement, so there may be some opportunity to gain some income without paying tax.
In the accumulation phase (and this can be decades), pensions need two things: money (usual maximum pension contribution limit £40,000 gross from all sources in a tax year, although more can be considered in some cases with carry forward), and time. If you have lots of time, this can be hugely effective in building up a pot for your future retirement. And don't forget that pension savings can start from birth (if you are a parent or grandparent eager to look after future generations).
The loss of higher rate pension tax relief would have been a disappointment for many higher rate taxpayers. However, saving for future retirement benefits within a pension remains worthwhile. If you have not reviewed your pension recently, and what it might achieve for you into the future, then please let us know and we would be happy to look through the continuing opportunities to save for retirement.
No individual advice is provided during the course of this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
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