Yes, the Budget’s looming large. This time he’s likely to slash tax relief on pension contributions for higher rate taxpayers and dramatically reduce how much they can put away each year into their pension pots.
If that’s not enough, he’s also – yet again and despite previous “promises” to the contrary – cutting the lifetime allowance (LTA, which is the maximum amount that can be saved tax-free into a pension).
The imminent further LTA cut could cost you a cool £34,375 in extra tax. Let me explain. Right now the LTA is £1.25 million, but in April it will fall to £1 million. So £250,000 that would yield you £62,500 tax free cash will all be taxed instead. Remove it as a lump sum and you’ll end paying 55 per cent tax on it.
Add to that possible losses in your tax relief (and for years to come), then stir in extra income and capital taxes on the margin as the years go by. Ouch.
Thanks to the interference of successive chancellors since 1987 we’ve seen an astonishing 589 changes in pensions law. More than 300 came in the six years that led up to “pensions simplification” in 2006, which robbed pre-1987 pension holders of their legitimate rights.
This illegal act was spotted by UK Law Lords, who threatened en bloc to retire in protest, only to be exempted while the rest of us were clobbered. Guess who’s unaffected by these restrictions? Yes, the Chancellor and the Prime Minister. So the further 200 or so changes in pension law that have followed “simplification” don’t affect them. Surprise, surprise.
The previous chancellor of higher taxes, Brown frae Fife, promised that in 2006 the LTA would increase in real terms every year. But that promise died amid the 200-plus changes since then, and for serious pension savers it’s got even worse under Osborne.
But despite that, private pension funds, if set up and invested properly, can still make outstanding flexible, tax-sheltered investments.
Right now a 40 per cent taxpayer gets an uplift in year one of 67 per cent from their net outlay, and the whole lot invested in a fund free of capital gains tax and probably free of inheritance tax too. And there’s more. Small-print changes made since last year’s “pension freedoms” provide tax-free income possibilities for generations of family members.
But be aware of the traps set for the unwary. Once you’ve protected your LTA you can lose it by either paying further contributions later on, no matter how small, to any pension plan.
Osborne has pledged that the LTA will be indexed in future, but his predecessor promised the same benefit before quickly reneging on the promise.
The lessons are plain. Take the best independent advice you can, as fast as you can. Take the tide at the flood, or face the miseries later. Your call.
Alan Steel is managing director of Alan Steel Asset Management