What should your pension planning priorities be for 2017? The short answer, for many people, will be “use it before you lose it” – the “it” in this case being the current generous levels of tax relief on pension contributions.
In a macro-economic environment where the government has again had to extend the timetable over when it expects the public finances to move into a surplus, tax relief on private pension contributions looks vulnerable to a Treasury hunting for more revenue. This is all the more so for a government supposedly on the side of “just about managing” families,
given the lion’s share of relief goes to higher earners.
The chancellor’s Autumn Statement dropped a broad hint about the direction of his thinking. “In 2014 to 2015 [the cost of pensions tax relief] was around £48bn, with around two-thirds of the tax relief going to higher and additional rate taxpayers,” the document said. “It is important that resources focus where there is most need.” So while Treasury officials insist there are no plans for any changes to the current system, it’s likely there soon will be.
The government, after all, has form in this area, having cut the annual allowance for contributions and lifetime allowance for how much you can accumulate in recent years. A new flat-rate relief is one widely discussed possibility, which would be likely to bring a significant cut in relief for higher-rate and additional-rate taxpayers.
Hence savers with the means to do so should consider maximising their pension contributions while they still have the chance, so make sure you’re taking advantage of your full annual allowance in the 2016-2017 tax year. This is 100% of UK earnings (excluding investment and rental income), up to £40,000 for most people.
If you have more than £40,000 in earnings, you may be able to carry forward unused allowances from the last three tax years, which could add as much as £130,000 (two years of £40,000 allowance plus the £50,000 allowance from 2013-2014). Subtract your total contributions over the past three years from that sum to find out what extra allowance you have available.
Two more potential threats to your retirement plans
• One attractive feature of the 2015 pension freedom reforms is that savers are now allowed to continue making pension contributions, and to receive tax relief, even if they’ve started withdrawing benefits from their pension schemes via an income drawdown plan. This may work very well, for example, for people retiring gradually via part-time work.
However, the chancellor has now announced a review of the rules and proposes to reduce the maximum such savers may invest each year – known as the money purchase annual allowance – from £10,000 to £4,000. This reduction is due to take effect from April 2017, subject to a consultation exercise.
Plan ahead for this change. If you’re already in a drawdown plan, your best bet may simply be to maximise your contributions while you still can. But if you’ve yet to start drawdown, take advice on how to avoid triggering the reduction in the annual allowance. For example, only taking tax-free cash from your savings won’t trigger the lower allowance; nor will cashing in pension funds worth less than £10,000.
• If you’re depending on state pension benefits to form the bedrock of your retirement finances, don’t assume the “triple lock” guarantee will still be in place by the time you retire. Successive governments have pledged to raise the state pension each year by the higher of inflation, average earnings growth or 2.5%, but this now looks under threat. The Autumn Statement promised to keep the current system in place until the end of this parliament, in 2020, but at that point there will be a review of its affordability.