IN THE BACK
PLATFORMS
will be locked into your pension
until you are aged 55.
If you are prepared to risk it, you
have a number of options.
UNUSED ALLOWANCE
on pensions costs the Treasury
£34.5bn a year and this is felt to be
unsustainable, particularly as high
earners receive the greatest benefit.
The most likely scenario is that
the chancellor opts for a flat-rate
tax relief scenario, with all pension
savers receiving the same benefit
– this feels more equitable and
in-line with the push to get all
employees into the auto-enrolment
system. Estimates vary, but it is
credible to assume that it would be
around the 30 per cent level.
WHAT CAN I DO NOW?
On the two assumptions that the
chancellor will a) change the rules
and b) reduce higher rate tax relief,
then there is a short amount of time
IF YOU ARE A HIGHER
OR TOP-RATE TAX
PAYER, IT IS HIGHLY
LIKELY THAT CHANGES
ARE ON THE WAY
to add to your pension pot before
any new changes.
If you have spare cash at present
and want to shelter it in your
pension under the current tax
regime, you will need to do it by 25
November.
You need to be aware that, if the
tax regime remains the same or
potentially improves, your money
Some savers have the chance to
plough in £80,000 — double the
annual allowance — this tax
year. In the Budget, Osborne
announced an extra £40,000
allowance for the period from
9 July to the beginning of the
next tax year, on 6 April. Those
who did not use any of their
allowance before 9 July are able
to contribute only the usual £40,000
during this tax year. Those who
paid in, say, £5,000 will have their
remaining £35,000 replaced with the
new £40,000 threshold.
It is possible to carry forward any
unused allowance from the previous
three years. Last year, the maximum
contribution was £40,000, while in
2013 to 2014 and 2012 to 2013 it was
£50,000. That means a saver could
pay in as much as £140,000 extra.
The lucky ones who have the
£80,000 allowance this year and
have not contributed a penny over
the past three years would be able to
put in a total of £220,000, generating
up to £99,000 in tax relief.
So, if you are a higher or toprate tax payer, it is highly likely
that changes are on the way, so
any investment into your pension
before the Autumn Statement could
lock you into the current tax regime
as experts believe that higher rate
pension tax relief will decrease
significantly.
Case study
JERRY, 45, IS A TOP RATE
TAXPAYER (45 per cent)
who is contributing £1,000
a month into his pension
and aims to retire at 65. To
contribute £1,000 a month,
Jerry only needs to invest
£550 as he receives 45 per
cent tax relief.
The government adds cash of
£200 a month (20 per cent tax
relief) and he can reclaim the
26
remaining 25 per cent (£250 a
month) via his tax return.
Therefore, over a 20-year
period, Jerry has contributed
just £132,000 and the
government has contributed
£108,000 in the form of tax
relief. If those contributions
had grown on average at a
net 5 per cent per annum,
over 20 years Jerry’s pension
pot would be worth £416,000.
If the government introduces
a 30 per cent flat rate of
pension relief, then Jerry will
need to contribute £700 a
month and the government
will add £300. Over the same
20-year period, Jerry will
have contributed £168,000
(£36,000 more) and the
government will have offered
just £72,000 in tax relief.
If the current system is
replaced by zero up-front
tax relief and we assume
that Jerry puts in £1,000 a
month into his pension from
taxed income, the ultimate
cost of his retirement fund
will be £240,000, a whopping
£108,000 more for the same
sized pension pot. However,
he would not have to pay
income tax on his pension
fund as he enters drawdown.
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