Election Opinions: Minimising the impact on Pensions

The end is nigh!  Main political parties line up drastic reductions in pensions tax relief.

Reading the pensions proposals within the major parties manifestos, anyone earning over £150,000 pa would be forgiven for wondering what they had done wrong.  Rarely do the main parties agree but Labour, the Lib Dems and the Conservatives have all proposed severely reducing pensions tax relief, if elected. Putting aside for a moment the debate of whether the policies are anti-aspirational let us look at what is being proposed, how it links in with the recent budget announcements and what higher earners should be doing before the election to make sure they minimise the impact regardless of which party or coalition is elected on 7th May.

The Conservatives

The Conservatives have proposed reducing the amount high earners can contribute to a pension.  Each year everyone has an Annual Allowance of £40,000 that they or their employer can contribute to a pension.  For those earning over £150,000 the Conservatives are proposing a gradual reduction in the Annual Allowance.  For each £1 earned over this limit, there will be a 50p reduction in the Annual Allowance until it reaches £10,000.  Therefore, anyone earning in excess of £210,000 each year will only be able to contribute £10,000 to a pension tax efficiently.

For high earners if we have a Conservative lead government after May a pension contribution pre-election looks attractive.

Labour

The Labour manifesto is a little light on detail stating that they will restrict pension tax relief for high earners.  However, Ed Milliband announced earlier this year a proposed reduction in the Annual Allowance to £30,000 and basic rate tax relief only for those earning above £150,000 pa.

So, for high earners if we have a Labour lead government after May a pension contribution pre-election looks attractive.

Lib Dems

The Lib Dems have stated that they will establish a review to consider the case for a single rate of tax relief which is higher than the basic rate but lower than higher rate.  Previous speculation on a single rate of tax relief has suggested 25% as a likely figure.

And guess what … for high earners if we have a Lib Dem backed government after May a pension contribution pre-election looks attractive.

Others

Whilst the UKIP manifesto is silent on changes to tax relief, the Greens appear to dislike private pension arrangements with vague ambitions to half all tax and NIC relief and impose some form of lowering of the Annual Allowance. We await details of the SNP plans but one would reasonably expect policies designed to redistribute wealth to north of the border and it is inconceivable that they would block any of the above proposals..

So what now???

Well, it looks pretty certain that funding a pension after the election will look a lot less attractive than it does now.  Add in the 2016 reduction in the Lifetime Allowance to £1m and it may well be beneficial to make one last contribution before the 7th May and take a long close look at applying to retain the current £1.25m Lifetime Allowance by opting out of further pensions savings altogether.  Don’t forget it is not just this years £40,000 that can be contributed before the election but also any unused relief for the past three years. 

If people do opt out of pensions the question is then how and what do they save into … but that is an entirely different blog for an entirely different day …

Matthew Brown, Private Client Partner