Should you start contributing more into pensions while you can still get the tax benefits

Published on February 4, 2016 by Andrew

Given the latest comment by George Osborne, and with similar comments in the Autumn Statement, it looks like pension tax is placed to get a bit of a shake-up in 2016. Bearing that in mind, there may be a possibility for HR taxpayers to really make the most of their retirement planning before the good times are taken away.

Although not yet verified, it would appear that the writing might be on the wall for approximately 5 million pension savers benefiting from HR tax relief. There’s a suggestion the lucrative reduction is going to be heavily restricted – and could even be scrapped completely, the Chancellor is already implying that significant changes to pension taxation is going to be revealed within the March budget. These changes could mean HR taxpayers lose the entire 40% relief presently given on retirement fund contributions.

Rather all savers, regardless of what rate tax paid, might be given a flat rate of tax relief at 33%. The Government could also design a less favourable tax system for savers with valued final salary pensions. The Government may also decide to remove tax relief on pension payments, making pensions similar to ISAs. This may affect all savers, or simply those that pay higher rate tax.

from the Governments £50 billion pension tax relief bill £35 billion is accounted for on higher earners. It has grown significantly from £17.6 billion in 2001-2002. Many consider the wealthy shouldn’t be in a position to reclaim such considerable amounts of relief whilst in work and pay lower rates in retirement. However, experts feel the Government must be careful here. Remove the inducement of saving and many individuals could finish under prepared for old age. The price of assisting struggling pensioners would certainly fall on the state – and all the working taxpayers.

We are aware of the annual pension allowance – the total amount you may contribute to pension each year and get tax relief on – will reduce for high earners next April. People whose earnings exceeds £150,000 will see reduced annual allowance, on a sliding scale, from £40k to as low as £10k.  The lifetime allowance, the most your pension funds are permitted to attain at any stage, will also be reducing, from £1.25 million to £1 million in April. So HR taxpayers need to consider contributing as much cash into pensions as possible within the next 4 months prior to the loss of these generous tax breaks.

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