Insurance companies have warned that forthcoming pension changes may be as much about raising revenue for the Government as encouraging those on lower income to save more.
The Chancellor is widely expected to make changes to the tax relief of pensions in the March 16 Budget – which could see the erosion of higher-rate tax relief, or the introduction of a new “Pension ISA”.
Pension company Aegon has warned that either move is likely to result in a further “tax grab” for the Chancellor.
Steven Cameron, the regulatory strategy director at Aegon points out that previous pension reforms have provided a tax windfall for the Government.
It is estimated that the ‘Pension Freedom’ rules – which allow most people full access to their pension funds from the age of 55 – will generate an additional £1 billion in income tax in the first tax year. These changes, which were announced two years ago, came into force in April 2015.
The Government has already raised a further £100 million from lowering the lifetime pension allowance from £18 million to £1.25 million, according to a recent Freedom of Information Act request. This lifetime limit will fall to £1 million from April this year, raking in further cash for the Government.
Cameron says: “The Chancellor’s pension freedoms have been widely welcomed as offering pension savers unfettered access to their pension savings. However many of those who have taken advantage of them will also have done their bit to help close the Chancellor’s Budget deficit.”
He pointed out that the original consultation on pension reforms was called “Strengthening the Incentive To Save.” He warned that this should be the priority with further pension changes, not increasing revenue for the Government. “Any moves in the forthcoming Budget to reduce tax relief on future pension contributions would represent a second tax grab on pension savers.”
Figures published last week by HM Revenue & Customs showed that the contributions into personal pension had risen, and where now back above the £20 billion level.
This rise has largely been due to the Government’s auto-enrolment programme, which has seen pension contributions automatically deducted from people’s salaries, unless they specifically opt out. This has particularly boosted pension contributions from younger workers, who previously were far less likely to save into pensions.
This HMRC data also shows that the cost of tax relief on pension contributions has remained at a relatively flat level for the past five years, largely due to the reduction in annual allowances.
Jon Greer, pensions technical expert at Old Mutual Wealth said: “The introduction of a tapered annual allowance for those earning more than £150,000 a year in April could assist in maintaining that level further.
“On the other side of the coin, the income tax received on pensions in payment is likely to show an increase for this tax year as pensions freedoms introduced last April have seen an excess of £3.5 billion withdrawn from pots. This data could be a crucial tool for Treasury modelling ahead of making a decision on changes to pension tax relief on March 16.”
His comments come as fund manager Fidelity called on the Government to ensure any forthcoming pension changes in this year’s Budget were “simple and inclusive”.
Richard Parkin, head of retirement at Fidelity International said: “Having made great strides in improving pension coverage through automatic enrolment and added flexibility through pension freedoms, increasing pension contributions is the last piece of the jigsaw.
“There is a huge amount at stake here in economic terms but also in creating a pension system that people can engage with and trust. The constant tinkering with tax relief that we have seen since the introduction of the current framework in 2006 has created confusion and undermined confidence in pensions.”
He added that the Government needs to be honest with savers about what the State is going to provide in retirement – to underline the importance of making additional provisions. “Tax relief reform should focus on providing a framework for that, which is both supportive, inclusive and sustainable.”
