For the last few weeks, we’ve warned you to stuff money into your pension while you can still claim higher-rate tax relief. That’s because, prior to this weekend, this month’s Budget was expected to contain proposals to replace all pensions tax relief with a single flat rate, or even to turn pensions into a form of Isa (individual savings account). But now the controversial plans have been scrapped, it seems.
With the Conservative party already in turmoil over the Brexit vote, and the financial industry still catching up with his pensions freedom reforms, it seems that George Osborne has had second thoughts – for now at least.
Clearly, any such U-turn would be a welcome reprieve for higher earners. But don’t get comfortable just yet. Quite apart from the fact that the chancellor could always change his mind again before Wednesday, even if Osborne does spare tax relief, the reprieve is unlikely to last for long. Pension tax relief for higher and 45% taxpayers costs the state billions every year in foregone revenue. That makes your pension pot a prime target for further cuts.
And there is “still plenty of wiggle room for changes in the Budget”, says Hargreaves Lansdown’s Tom McPhail. One option is to reduce the annual allowance, which currently stands at £40,000. This is the maximum amount you can pay into your pension each year. A second possibility would be to slash the Lifetime Allowance, which will fall from £1.25m to £1m from 6 April. That may sound a lot, but if you’re young and a relatively disciplined saver, it’s easier to hit than you might think.
Osborne may also consider tweaking the annual allowance taper. As of 6 April, anyone earning over £150,000 will see their annual pension allowance tapered away until it falls to £10,000 for those earning over £210,000. The taper rate or the thresholds could be nudged down further to bring more people into the fold. Finally, he could crackdown on salary sacrifice schemes.
So make sure you take advantage of existing pension tax relief while you can. If you were planning to ramp up your contribution this year, do it. And if you’re lucky enough to get off the hook this year, consider contributing as much as possible during the year to come too – after all, once the Brexit vote is out of the way, Osborne may well have the confidence to revisit his pension plans.