Hands off! Pensions used as government piggy bank, deterring saving

The dust has barely settled on the new pension reforms, yet the government is already planning further changes with restrictions on tax relief to fund other causes. Tax relief is a big incentive to save for retirement, so reducing it could deter savings. 

The Conservatives have pledged not to increase VAT, income tax or national insurance during this parliament. So where will money come from? Reductions to tax relief were made clear in the run up to the general election as the political parties had been discussing what they would use the cuts for if they won the election; Ed Miliband pledged to cut tax on pension contributions to fund a reduction in tuition fees from £9,000pa to £6,000pa, while David Cameron proposed to slash inheritance tax by reducing the annual allowance for higher earners. During the Queen’s speech, it was announced that tax reductions will be scaled back to fund more free childcare. Currently, the state provides 15 hours of free childcare per week for three- and four-year olds, which will be doubled to 30 hours per week.

Since 2010 the lifetime allowance has also been reduced, almost by half, from £1.8 million to £1 million (effective from April 2016). A million pounds may seem like a lot of money to fund your retirement, but a pot size that large may only be enough to purchase an annuity income of £17,000 to £20,000 per year*. This means that you would need to live for at least 50 years during retirement to receive all of the £1 million you saved.

The lifetime allowance is a controversial measure, Ros Altmann, the pensions minister, is one of its critics: 

Surely the point of pension saving is to benefit from long-term investment returns.  That means it makes sense to limit the amount people can put in with the help of tax relief, but does not make sense to then try to punish them if their fund grows sharply… with defined contribution schemes, the better policy would be to control the amount put in each year but then allow the pot to grow as well as it can, without penalising it if it rises strongly.Therefore, I would like to see the Lifetime allowance abolished for DC schemes.

Research conducted by Portafina shows that 90% of survey respondents aged 35 to 55 believe more should be done to encourage retirement saving given the low income offered by the state. It is clear savers are encouraged by tax reductions so pensions should be left alone and not used as a government piggy bank. If cuts continue to be made they could drastically impact on the amount people save and their future retirement income, potentially forcing people to rely on the state and reducing a key source of investment capital for UK business. 

What are your thoughts about reducing tax relief? Let us know with a comment below.

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Important information

* The quote for an annual income, retrieved on May 21 2015, is based on a 65-year-old male in good health taking 25% tax-free cash and purchasing a guaranteed annuity with escalation in line with RPI and a dependent’s percentage of 50%.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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