Chancellor Jeremy Hunt’s push to scrap UK pension tax looks set to benefit many high-income earners, including doctors, lawyers and bankers.
But this week’s announcement raises as many questions as it does answers. Pensioners and pension savers alike are trying to figure out what it means for them. Tax planners have been inundated with questions.
Meanwhile, Labour, which is favorite to win the next general election, has pledged to scrap Hunt’s changes, raising doubts over how long the chancellor’s scheme will survive.
Broadly speaking, Hunt has scrapped the £1.073 million old age allowance (LTA) which caps the number of workers who can benefit from tax benefits in their pension pot. From April 6, tax-advantaged pots will be unlimited.
They also raised the annual allowance from £40,000 to £60,000 which limits how much savers can add to the pot in any year. And he raised from £4,000 to £10,000 the so-called money-buying annual allowance, limiting the contribution of people who had previously accessed the pension pot and then continued to save.
Hunt’s stated aim is to prevent older workers, who are paid more than pensions, particularly senior staff in the NHS being under pressure. However, critics, led by Labour, accuse him of changing the pension system to benefit the rich, not least to cut inheritance tax.
Of course, people with an accumulation pot of £1 million and above will most likely benefit from the abolition of LTA. So are the more squirrels.
But the increase in the annual allowance will benefit the majority of middle-income people, people who earn £100,000 a year, with the means to use the allowance, and below £260,000, when concessions begin to fall.
FT Money writers look at the main question.
How can we make the most of these tax changes?
For most retirement savers on low and middle incomes, scrapping the age allowance will make no difference. However, for the estimated 2 million on track to a large retirement pot, there are substantial savings to be made.
If you’re planning to withdraw money from your pension, delay it until April 6 and the new tax year, especially if you have a final salary – defined benefit – scheme when your lifetime tax costs are applied directly to the pot above £1.073 million. .
If you withhold pension contributions, because you don’t want to get a lifetime allowance, or because you risk falling short of your annual allowance, you can now pay more, with the lifetime allowance disappearing and your annual allowance rising to £60,000. But if you earn more than £260,000, this will be capped at £10,000, up from the previous threshold of £4,000.
If you take money out of your pension – for example to deal with the cost of a life crisis – and trigger tax charges, the amount you can pay if you restart your pension contributions will increase to a maximum of £10,000 per year.
Those who have not been able to increase their pension in previous years can continue for up to three years in the tax year. So, the maximum people can pay into their pension from April is £180,000 – a tax saving of £81,000.
What can I do now to limit any influence Labor may have?
If the proposals go ahead, if you are already – or approaching 55 – you may want to increase your pension as much as possible to make the most of the new benefits. Then, on the eve of next year’s general election, extract a lump sum to make sure you won’t be hit with future tax changes.
If you are younger and managing your pension to stay on the age allowance, the decision is more difficult. While it’s not advisable to make savings decisions on future policies, making quick payments now could make you less likely to breach Labor benefits and face tax charges.
But as David Hearne, chartered financial planner at Financial Planning Partners, said: “I think everyone needs to think very carefully about what the opposition parties say they will do, especially when they respond to a surprise policy announcement, just a day later. .”
I am rich and worried about inheritance tax. What can be done to maximize IHT benefits, assuming the new pension tax regime remains in place?
The Chancellor has created an unlimited inheritance tax shelter by scrapping the pension age allowance. Today, if someone dies before the age of 75, the pension can be transferred to the heirs tax-free only if it is within the age allowance limit. From next month, this limit becomes.
If maximizing your IHT benefits is your aim, Tom Selby, head of pensions policy at investment platform AJ Bell, says: “It’s just a case of contributions you can afford and the rules allow.”
You can invest in your pension from your income, limited to your annual allowance each tax year. Insurer NFU Mutual calculates that if a person puts the maximum annual allowance of £60,000 into their pension from 6 April, and a further £60,000 for each of the next 10 years, they can build a pot of £812,298, assuming 4 per cent growth. after monthly compounding fees. This will provide an inheritance tax saving of up to £324,919.
Sean McCann, chartered financial planner at NFU Mutual, predicted: “We will see more people taking money out of Isas and other investments subject to inheritance tax before accessing their pension.”
However, maxing out your pension contributions can be difficult if your income (including investment income) is very high, due to the tapered annual cap on contributions, starting at an income of £260,000.
There may be some downsides. Matt Conradi, chief client adviser at Netwealth, warned: “If you have some form of historical LTA protection, it’s not clear whether increasing your funds will remove the level of protected tax-free cash.”
However, you may see other tax efficient investments such as certain Alternative Investment Market shares eligible for Business Property Relief. Or reduce your IHT liability by setting up a trust or gifting money, under the seven-year rule, where tax charges taper on gifts before death.
What happened to LTA protection? Will it become irrelevant now?
No, the Treasury has confirmed that all existing protections can be maintained if the conditions laid down are met. As the government succeeded over time in reducing the rate of LTA tax costs were applied, they gave so-called protection to savers at a higher rate earlier, as long as the saver stopped increasing the pot.
The existing LTA-based protection remains valid in areas where it is important to access the tax-free lump sum, which savers do at the start of their retirement. For most savers, this is 25 per cent of the current £1.073 million LTA but for older people, it is up to £1.8 million.
Hunt has now scrapped LTA tax charges from April 6, but the 25 per cent cash rule is frozen indefinitely. Labor has yet to decide what to do.
I am still working, but stopped contributing to my pension because I hit LTA. Do I need to restart the payment?
In general, yes. If you get protection at HM Revenue & Customs with a lifetime allowance, you can now break the LTA limit with penalty-free contributions.
If you simply stop paying without protection, you can start contributing again, also without penalty. Self-employed savers can use a self-invested personal pension (Sipp), but employees must apply to join a workplace pension scheme to benefit from employer contributions.
After a career break, workplace retirement options can be limited. Steve Webb, partner at Lane Clark & Peacock, explained that public sector workers can restart their benefit plan (DB). But in the private sector, many DB plans have been closed to new accruals, so you may have to join the defined contribution offering, he said. Employer contributions still mean this is better than taking a private pension.
Also consider Isa contributions, says Megan Jenkins, partner at Saltus, the asset manager. “Pension rules can change again.”
I retired with a £2 million pension and had other assets. Should I sell and put the money into my pension pot?
Unfortunately, the new £60,000 annual allowance may not be available to you if you stop earning. Jenkins said: “If you no longer have pension income, the amount you can put into your pension is limited to £3,600 gross a year.”
The situation can be better if you have income generating assets. Netwealth’s Conradi says if you have income that qualifies for tax relief, such as holiday earnings, you can make a donation using your annual allowance. “However, things like dividends and interest are not relevant,” he said.
But don’t rush to sell your assets. Selby at AJ Bell warns tax liability on asset sales “needs to be considered”. Also, having a variety of assets can protect against market volatility.
As an NHS employee, how will I be affected by this week’s changes?
The NHS pension scheme has been made more flexible to encourage people to work longer.
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The scheme consists of three parts, with a general reduction in generosity – the 1995 part, the 2008 part and the 2015 part – with many staff getting entitlements in different parts.
Until now, retired members of the 1995 scheme returning to work had to do so without retirement. From now on, members of the 1995 scheme who want to return to work after retirement can take full pension benefits, then join the 2015 scheme and build up more pension savings.
Many NHS employees in the 1995 scheme stopped working at 60 because delaying retirement beyond that age would not bring a higher pension. Now it will. “This will remove the key disincentive to work beyond the age of 60 to 1995 members of the scheme,” said Claire Trott, director of the division of retirement planning at St. James’s Place, wealth manager.
I am a buy-to-let investor. Should I sell the property and put the funds into retirement?
Landlord investors, in recent years with regulatory and tax changes including the loss of relief on mortgage interest, are now facing an increase in interest rates on mortgages. Unsurprisingly, some are selling.
For those who own private property and are considering a sale, removing the LTA “can certainly be seen as an alternative offer,” says Graeme Bone, financial planner with Beaufort Financial (Pathfinder).
But for landlords who own through a corporate structure – the majority of full-time landlords with large portfolios – their businesses are more likely to remain viable and pass on to heirs through share ownership.
For both types, the attraction of retirement savings must be weighed against the cost of selling, as selling may result in capital bills.
Another worry is whether LTA Hunt’s removal stands the test of time. Neal Hudson, founder of Residential Analysts, said: “This is clearly going to be a political target in the future.”
Reporting by Mary McDougall, Moira O’Neill, Chris Flood, James Pickford, and Stefan Wagstyl