THE ODDS are shortening on the Chancellor targeting pensions in next week’s Autumn Statement as he seeks to balance benefit cuts with measures targeting middle and high income earners.
The government is thought to have ruled out new taxes on wealth and high-value properties, defying calls to spread the pain more evenly amid controversial benefit cuts. But measures reducing the contributions that high earners can make to pensions and receive tax relief are almost certainly on the cards.
Rumours that the Chancellor might scrap higher rate tax relief on pensions entirely, reducing the relief available to the basic rate level of 20 per cent, seem unfounded. But experts instead believe George Osborne is set to slash the annual allowance (the amount that can be saved annually into a pension and attract tax relief), having previously lowered it £255,000 to £50,000 a year in 2010.
Now he’s expected to cut it to £40,000 or even £30,000, saving up to £600 million and £1.8 billion respectively. Neil Whyte, tax partner at PKF, said. “Cutting the rate of tax relief back to the basic rate would hit too many middle-class voters, so the Chancellor is more likely to reduce the annual contribution limit from £50,000 a year to £40,000 or even £30,000.”
Others warned that anything affecting tax relief on pension contributions would backfire, however. “It is essential that people are able to save for the future without the goalposts being shifted so often,” said Robert Hair, head of financial planning at Turcan Connell.
“Although many people will see the annual allowance being out of reach and might have little sympathy for those who can afford to make large contributions, pensions’ tax relief is a sensible part of a ‘deferred remuneration’ framework to ensure that people are not dependant on the state in retirement.”
But there may be better news in the form of help for those in drawdown. This is where pensions remain invested at retirement instead of being used for annuity, with a certain level of income allowed from the fund each year.
Drawdown users have been hit hard by a combination of lower gilt yields and the government lowering the maximum income that can be taken, with some seeing their annual income slashed by up to half.
Calls for the government to increase the maximum that can be taken may well be heeded in the statement next week. “Annuity rates have fallen to historic lows, so by increasing the drawdown percentage to, say, 120 per cent – as it was a few years ago – pensioners currently on low incomes would benefit,” said Whyte.
Motorists may also get a welcome boost, with Osborne expected to defer –again – a 3p rise in fuel duty, scheduled to take effect in January. But long-suffering cash savers, who have seen inflation wipe out the gains on all but a tiny handful of savings accounts over the past three years, could again be left out in the cold by a Chancellor considered unsympathetic to their plight.
Savers have also been hit by the Funding for Lending scheme, launched in August to boost the mortgage market. The cheaper finance available to lenders has reduced their dependence on savings deposits and interest rates on savings accounts have fallen accordingly.
Savings providers want the Chancellor to open up the annual tax-free individual savings account (Isa) limit so cash savers can put up to £11,280 in a year, the maximum level for equity Isas. However, their plea will almost certainly fall on deaf ears.