In our final instalment in our series on pensions, we consider what the future might hold.
And what of the future?
While there is a great deal of political uncertainty in the UK at present, and there remains scope for further cuts to both tax relief on pension contributions and to the lifetime allowance itself, our current view is that any future changes are likely to be less severe than we have seen in recent years.
There is certainly greater acceptance of taxation on pension benefits among the general public when it is perceived to be a ‘tax on the rich’. The changes introduced in 2016/17 brought the spectre of hefty annual and lifetime allowance charges to the domain of senior public-sector workers, such as NHS doctors and management, senior Police officers and civil servants, many of whom have decided to take early retirement, rather than carry on working and face lifetime allowance charges.
A move to a flat rate of tax relief on pension contributions would also add a further layer of complexity to an area which is hardly renowned for its simplicity, at a time when an enormous amount of other legislation will need to be rewritten following Brexit.
There is also the need to continue to encourage and incentivise people to save for their own retirement. While auto-enrolment has helped this to an extent and is the ‘stick’ part of the approach, the vast majority of people are still not saving enough to fund a comfortable lifestyle in retirement, and so a ‘carrot’ is also required in order to encourage further saving.
The impact to lifetime allowance.
The lifetime allowance is becoming increasingly viewed as a ‘tax on growth’, which penalises those who have invested wisely and made the most of their pension funds. Given the significant recent restrictions on how much can be contributed to pensions in the first place, there will be much less need for a measure to restrict the amount people hold in pension funds when they take benefits, and the lifetime allowance may even be abolished at some point in future.
However, it is hard to envisage that any future removal of lifetime allowance constraints would be extended to the same generation that was afforded the opportunity to contribute up to a quarter of the current lifetime allowance within a single tax year.
And what about the impact of Inheritance Tax?
For those with both investment and pension portfolios, the current tax regime heavily favours making use of investments to fund retirement needs and leaving the pension fund as a legacy to children, which may appear somewhat counterintuitive. This is partly because it is possible to leave pension funds to families and friends without IHT, whereas up to 40% of an investment portfolio could be lost in IHT charges upon death. At the same time, the rates of capital gains tax (CGT) when selling investments (except investments in residential property) are at record lows of just 10% within the basic rate tax band and 20% for gains in the higher and additional rate tax bands (i.e. possibly half the tax payable if drawn as income from a pension fund). If future governments seek to make anything less generous, it could well be this position which changes first.
Of course, none of us know the future and things can change very quickly. Perhaps the best approach is to plan to be as flexible as possible; to benefit from generous rules while they exist, but also leaving some scope to alter course if necessary.
How can Paradigm Norton help?
Given the ever-increasing complexity of pension and tax legislation, it has never been more important to make use of expert tax and financial planning advice. At Paradigm Norton, we carefully consider the implications of all of these changes upon your financial position and will advise you accordingly as part of our review process and service.
Paradigm Norton is a financial planning firm that can advise and guide you with your retirement and pension planning. To speak to one of the team, call us on 01275 370 670
Understanding the various pension allowances is an important part of your retirement planning and overall lifetime financial planning. Tax legislation is subject to change and depends on individual circumstances.