Autumn Statement - Last Chance Saloon For Pension Higher Rate Tax Relief?
The big talking point ahead of the 23rd November is what, if any, changes might be made to pensions.
- The Life Time ISA (LISA) - Precursor To A New 'Bonus' Related Form Of Pension Saving?
Many believe that this new tax efficient investment (due to be launched on 6th April 2017) represents a small piece of Government sponsored market research. As it is a form of saving which gives investors the incentive of a yearly government bonus as opposed to the tax relief of pensions it represents a different (and probably much cheaper - for the Government that is) way of incentivising people to save for their retirement. The uptake, or not, of the LISA could well act as the precursor for more fundamental potential changes to the tax relief system of pensions.
- Exempt, Exempt, Taxed
The current pension regime is well known. Contributions are exempt from tax (meaning doctors get higher rate tax relief on their contributions) and investment returns within the pension are also exempt. Apart from the 25% tax free lump sum, then the rest of the proceeds are taxed at doctors' marginal rate of tax when they take their pension. This costs the Government a net £30 billion annually with the majority of the tax relief going to higher and additional rate tax payers. There is therefore an obvious cost-saving motivation for the Government to reform this regime. Will the Government make changes to higher rate/additional rate tax relief?
- The Tax Free Lump Sum?
It is thought that removing the Tax Free Cash as an incentive for investing in pensions would be a step too far. This benefit is much loved across all savers regardless of tax rate and is such a fundamental part of the pensions landscape to date.
- A Flat Rate of Tax Relief?
A flat rate of tax relief would set a strong message of re-destribution of wealth which would align itself to the new rhetoric coming out of Number 10. A rate of say, 30% would see the tax benefit in relation to contributions reduced by 25% for higher rate taxpayers and the benefit to basic rate taxpayers iincreased by 50%. This change in the regime would potentially lead to better outcomes for basic rate tax payers (by increasing their incentive and therefore their savings habits) but may not save the Government much money in the long-run and may even increase the cost of tax relief.
- Lifetime Allowance/Annual Allowance Changes?
Might we see a re-alignment of the above if radical changes are made to the current pension tax regime? Possibly, but not necessarily.
In summary, pension change is certainly a possibility, but it is far from being a certainty. However, if you are a higher rate tax payer, have the capacity to contribute (possibly taking into account unused relief) and almost certainly would be going to contribute anyway, then it may just make sense to do so before 23rd November.
If you are a higher rate tax paying doctor and believe that you have scope for further pension contributions then please do get in touch with Richard Higgs, Chartered Financial Planner for doctors in Bristol on 0117 966 5699 or email firstname.lastname@example.org.