A cut to the annual allowance is the “most likely” change to pensions tax relief that Chancellor Philip Hammond will make, Royal London director of policy, Steve Webb, has predicted.
Following a report in The Times last week that said Hammond described pensions tax relief as “eye-wateringly expensive”, many in the industry now believe that pension contribution allowances will take a hit. Pensions tax relief costs the government around £25bn a year, a cost that has risen sharply in recent years.
Webb believes that a cut to the annual allowance could leave more than 100,000 higher earners each £4,000 worse off. He predicts that the annual allowance could be cut down to £35,000 or £30,000, and the threshold at which higher earners start to face a reduced allowance could be cut down to £125,000 from £150,000.
Webb said: “Time and again, pension tax relief has been the go-to source of money for cash-strapped Chancellors. Pensions should be a long-term business where people can plan with confidence for their retirement, knowing that the tax rules around pension saving will be stable.
“But the Chancellor will find it hard to raise other, more visible, forms of taxation and is likely to revert to the ‘salami-slicing’ of pension tax relief. We fear that the amount people can contribute into their pensions each year will be cut yet again, sending out entirely the wrong message at a time when we need people to be saving more, not less”.
Another industry expert, Zurich head of retail platform strategy, Alistair Wilson, has warned that slashing the annual allowance further will penalise the self-employed. He explained that self-employed workers often have to choose whether to contribute to a pension or invest in their business. This means they may only be able to make ad hoc contributions as they go or larger payments nearing retirement.
“Britain’s growing population of self-employed workers already misses out on benefits such as auto-enrolment, making it harder for them to save for retirement. Restricting the amount they can save would penalise them further. The government should resist any further changes to the pension system.”
Wilson said that if the government presses ahead with changes to the annual allowance, any reduction should be matched by an increase in the number of years people can carry forward unused allowances. Alternatively, he said the government could introduce an age-related annual allowance that would increase as savers near retirement age.