The Autumn Statement will be upon us again in November and it seems like we will be dusting off the same potential threats to tax relief on pensions as we have fretted about for the past couple of years. The Government have pulled back from acting upon the rumours at the last minute in recent years, but this time it might just be different.
This will be Philip Hammond’s first Autumn Statement and will give us the first indication of what the next four years may entail. There can be no doubting the forthright nature of the newly installed Conservative Government and if that continues, one can imagine a definitive Autumn Statement with little room for manoeuvre after the event. Mr Hammond has already signalled his intent to change the focus away from some of his predecessor’s goals, as he has announced his intention to axe the spending deficit target in favour of trying to bolster the UK economy through Brexit by way of additional spending on transport and homes.
With Theresa May’s Government invoking a renewed sense of fairness for all UK citizens, the sirens have sounded once again for pension’s tax relief.
There is of course a danger that we ourselves sound like a broken record when discussing the potential reduction in pension’s tax relief. We have predicted for at least the last three years that a significant change is on the way and so we have been encouraging our clients, particularly those higher rate taxpayers, to contribute as much as they are able into pensions whilst the current rules apply. 2016’s Autumn Statement may be the moment when our prophecy comes true.
We are weeks away from the Autumn Statement, but already the news is starting to filter out that changing pension’s tax relief is something that would fit neatly into the Conservative agenda. How this would play out is as yet unclear, but it could conceivably work in a couple of ways. Either, higher rate tax relief on pensions is abolished entirely and so all pension contributions receive a maximum of 20% tax relief regardless of earnings; or a new flat rate of tax relief is introduced somewhere between the present 20% basic rate and 40% higher rate bands, a figure of around 30% is often touted. The latter flat rate option is the more likely of the two, as it reduces the benefit to society’s higher earners, whilst incentivising basic rate tax payers to contribute into pensions by offering higher relief. The ideal solution for a Government determined to rebalance wealth in the UK, whilst saving some money from the wealthier to help pay for new transport and homes.
Our message is clear, higher rate taxpayers should review their available pension contributions ahead of the 2016 Autumn Statement.
Pensions will take the headlines if the Chancellor chooses to push ahead with tax relief reform in November, but I doubt that will be the last reform he needs to make for savers. Help to Buy ISAs have hit the headlines for all the wrong reasons lately with the small print precluding many savers from completing on property transactions when they realise that the Help to Buy ISA cannot be used to fund a deposit, and as restrictions come to light on the overall value of the property for qualifying shared ownership deals.
The Lifetime ISAs (LISAs) announced in George Osborne’s last Budget are also proving a stumbling block for many providers, with only one so far agreeing to launch a LISA in April, many are stalling as they establish demand for the product from savers, with Nationwide foregoing LISAs completely at this stage on the grounds of them being too complex for savers.
We feel pension’s tax relief will be the first reform for the new Chancellor. It is a relatively easy sell to the wider public and fits well with the “centre ground” support they seek. Beyond that, I would expect to see an overhaul of ISAs. The Government are intent on affordable and available housing and so they need to nail down a solution which can feasibly achieve home ownership. At the moment, one does not exist. The next phase may be a rehash of existing ISA options, or potentially further pension reform to come up with a solution that works for younger people as well as for the older generations. Options are being mooted, such as allowing one contract to fulfil both pre-retirement and post retirement needs by way of the saver being able to borrow from the one contract in the early years to buy a property, with no penalties applying should the borrowing be repaid in full ahead of retirement. At the moment, the UK pensions and savings industry feels a long way from such pragmatism, but with a new regime in charge and weak political opposition, perhaps we are closer than we have been before.