For the first time in a while I have good things to say about the Telegraph’s reporting on pensions. Rob White is right to point out that with restrictions on raising income tax, the Chancellor might choose to go for the taxation of our later life income – our pensions.
Reducing the cost of pension tax relief today
It points to a statement when in opposition from Rachel Reeves where she proposed a flat rate of taxation, the Telegraph do a spot poll of whether we’d go for a generous 33% flat rate. 42,453 readers have voted. I thought that 33% tax relief would bring out the “yes vote” and it has – me included! I think that 33% flat won’t save much money though!
But it gets better with comment from Callum Cooper of Hymans, whose paper is well known to readers.
Calum
agreed that a flat rate of tax relief was one place the Chancellor was likely to look, but warned it came with political risks.
He said: “An alternative that’s gaining quiet traction in policy circles is a shift in the timing of tax relief. Under a new system, individuals could contribute out of post-tax income and receive a government top-up, with pensions then exempt from income tax on withdrawal.
“The effect is fiscally similar and has no impact on take-home pay or take-home pensions, but it provides the Treasury with £22bn-plus more cash to invest in the short term by taxing income now rather than later.”
Thanks Calum and the Telegraph for promoting an idea that I would vote for if I was voting.
Taking aim at tax-free cash – good idea.
Means test our capacity to take tax-free cash from our pensions? I chose not to take tax free cash from my defined benefit scheme because I would have been ripped off by the trustee’s conversion factors, but it’s simpler with DC where you simply cap the amount of the pot that can be paid as cash at 25% or an amount of money – say £100,000 (capping anyone with more than £400,000 saved).
Rob Morgan, of investment manager at Charles Stanley, said:
“I have a niggling concern that the tax-free cash limit is, operationally, a lever that’s quite easy to pull.
“There is the potential to set a higher or lower cash limit fairly easily and target those with larger pension pots without disturbing the ‘25pc tax-free cash for most people’ narrative.
“If the tax-free cash limit stays frozen, this would provide another example of the fiscal drag that governments are so fond of and it would raise some extra revenue. But it could also be reduced by any politician looking in envy at the amount being released tax-free from defined contribution pots.”
I don’t know many people in DB schemes (politicians still are) who look at those in DC schemes with “envy”. I think they are enjoying the prospect of a lifetime income as I am, from a DB plan. I think means testing the tax-free cash is a very good idea, it has already been done once (£268,275) and I hope it is done again.
“Decimating” Salary Sacrifice
Decimating means kill one in ten or make it hard for the rest to carry on – not quite the right word but banning salary sacrifice would leave a proportion of savers saving less and those who don’t get switched back to employee contributions wondering why their pay packet is a little lighter. Here are the numbers
National insurance is the new income tax and salary sacrificing is weird because it most helpful for those on low to average incomes. I don’t think that salary sacrifice will be taken away from those on such incomes, but I can see higher earners facing obstacles.
I’d like to see a nuanced version here to enable those not paying higher rate tax but paying a lot of national insurance to get the maximum benefit of NI sacrifice. So it’s a half in , half out approval from me.
Shrinking the pensions annual allowance
Currently, savers can put up to £60,000 or their annual salary, whichever is higher, into their pension each year before facing a tax charge. They can also take advantage of any unused allowance from the previous three tax years.
However, it was only £40,000 as recently as 2023 before then-chancellor Jeremy Hunt increased it.
Rob Morgan of Charles Stanley told the Telegraph that one alternative to restricting salary sacrifice would be tightening the annual allowance or carry forward rules – or both.
He added:
“Carry forward is much used by those with lumpy earnings from year to year or have a need to ‘catch up’ on their pension savings – and it could be devastating for a small minority.
“However, one suspects that it could be one of those incisively targeted moves that isn’t beyond the realm of possibility.”
Andrew Tully, of Nucleus Financial, said:
“Such a change may also impact the ability or willingness of some public sector workers, such as senior doctors, to take on additional work.”
You can tell the kind of providers who are concerned here – it is the SIPP providers, or “wealth managers”. Frankly, if you are getting more than £40,000 paid into your SIPP, workplace pension or funded or unfunded DB pension plan, you need to be feeling vulnerable to Rachel Reeves and I’m on her side not yours!
Hitting employers with a second National Insurance raid
In the Budget, businesses were hit with a £25bn tax grab through an increase in National Insurance contributions for staff.
The hike, from 13.8pc to 15pc, has already led to a seven-year low in job vacancies outside the pandemic, while data has also suggested it marked the death of the pay rise.
Andrew Tully said:
“This is a tax on employers so it may be less obvious to employees, although the impact is likely to hit employees in terms of lower pension contributions or lower salaries if employer costs rise.
“It will also have a negative impact on growth if employer costs grow, so it may not be attractive to a Government which is putting UK growth front and centre of its strategy.”
Andrew Tully is on the mark, the impact on employers who employ large numbers does not nee a pension tax on contributions.
Well done the Telegraph, Rachel Reeves and Torsten Bell (oops!)
Taxation of pension contributions and benefits is a popular area of speculation amongst financial journalists and this speculation is probably as good as you are going to get right now.
There are of course many other areas where pensions benefit and are taxed, funded pensions are impacted by exemptions and levies on investments. Let’s not suppose that the sums for the Chancellor are as simple as contribution and payment taxes.
But I enjoyed seeing all the speculation martialled together in a single article and happy to include my thoughts which have been aligned with Torsten Bell’s and Rachel Reeves’ – so far.
A fuller picture
I receive a number of “Pensions”, State, Annuity, Self Employed, SIPP Drawdown, and ex Gratia. My total Income is around £20,000 and due to the non-lift of Personal Allowance every pension is taxed. I am completing my SIPP Drawdown and putting the net income into an ISA where I receive between 5% and 11% in dividends/interest – all non-taxable. I can sell investments to produce a lump sum if needed. I now suggest minimal pension contributions and boost ISA.
I for long had similar thoughts to you, James.
Although I would regard myself as a pensions specialist I too have personally been thinking of ISAs and my personal pensions (SIPPs) in the same terms.
The more the pension communications are improved such as through the dashboard the distinctions will become increasingly blurred.
I can see people wishing to manage their pension pots and drawdown on their phones based on their cash flow needs and market conditions on the day as they currently do with ISAs. This will not only bypass advisors but also mitigate against the use of trust based products particularly default megafunds with their emphasis on long term investment goals. If you match the tax position to ISAs, this would only surely emphasise this trend.
I suspect we may end up with tax relief only on contributions to arrangements which provide defined or targeted pension benefits in later life (DB, CDC. etc.) and tax all withdrawals from the fund (annual pensions as is the case now, cash withdrawals whether as a lump sum on through drawdown, and possibly DB to DC transfers). This would preserve employer’s tax relief which in my mind is absolutely key to pension adequacy, with perhaps a reintroduction of a form of SERPS based on taxable income for the self-employed and those living off inherited wealth.
“Currently, savers can put up to £60,000 or their annual salary, whichever is higher, into their pension each year before facing a tax charge.”
Correct, but often misunderstood in the popular press.
For gross personal pension contributions to get tax relief they have to be within the Relevant Earnings for the tax year (or £3,600 for a very low earner). Relevant Earnings are basically income from employment/self-employment, savings and pensions income does not count.
“They can also take advantage of any unused allowance from the previous three tax years.”
Sorry, no, this is unfortunately oft repeated but is incorrect.
You can only use ‘carry forward’ of previously unused allowance IF the current year annual allowance* limit is reached by a total of gross personal and employer contributions, and were a member of a scheme in the previous years concerned, and you have the income to spare from Relevant Earnings.
So someone earning say £20,000 this year cannot make a gross contribution this year of more than £20,000 and get tax relief, irrespective of any previously unused allowance.
If in doubt anyone can phone the MoneyHelper helpline for an explanation 0800 011 3797.
*Annual allowance is potentially subject to a tapering reduction if total taxed income is very high, or MPAA/Alternative Annual Allowance if a pension has previously been accessed. MPAA cannot be carried forward.
On re-reading I’ve realised that the first statement I quoted “£60,000 or their annual salary, whichever is higher” is also wrong.
Higher should read LOWER for personal tax relief, and the £60,000 refers to the standard Annual Allowance*, a limit which is tested against the total contributions/increase in DB benefits and therefore includes the effect of employer contributions. Consequently, the maximum personal contribution attracting tax relief with a generous employer may be even lower, even with the standard Annual Allowance*.
*The Annual Allowance may be lower in some circumstances as noted above.