Pension tax relief update – no news is good news (?)
A quick round up of our thoughts on how today's Spending Review may affect our clients.
There was no update on plans around pension tax relief, in response to the recent Green Paper consultation, “Strengthening the incentive to save: a consultation on pensions tax relief”. This paper raised the possibility of the removal of up-front tax relief on pension contributions and, presumably, the Chancellor’s response will now follow in the Budget next March.
The fact that the Government has not made a quick decision on this is very welcome, as such a change would be very significant and may disadvantage many of our clients who are currently contributing to pensions. We remain of the position that a period of stability in the pension rules would be helpful, while the recent – generally welcome – changes around access and death benefits filter through.
Many of our clients are concerned about the reliability of pensions as a long term planning tool, given the shifting landscape and the recent pattern of increasing then contracting allowances. People are legitimately asking whether the set of incentives currently in place can be relied upon for their long term planning. Any further significant changes in the near term (and a reversal of the tax treatment would be a huge change) could further fuel this perception, potentially damaging the take up of these valuable tax structures in the future and harming the Government’s aim of cultivating further incentives to save.
For those who are contributing to pensions, particularly where they are eligible for higher and additional rate tax relief, this represents, at the very least, an extended opportunity to make the most of the planning opportunities currently available to them. With this in mind, many of our clients will wish to talk to us about maximising tax-efficient pension contributions before March 2016, and we welcome these discussions.
State pension increases - will somebody please think of the children
The basic state pension is to increase by £3.35 a week, to £119.30, from next year, while the new single tier state pension is to be set at £155.65. George Osborne described this as the biggest real-terms increase to basic state pension in 15 years. He restated his commitment to the “triple lock”, under which the state pension will increase by whichever is higher – inflation, wages or 2.5%.
At the same time, he referred to state pension age ‘increasing with life expectancy’. It was unclear whether this referred to previous changes or to plans for more increases, beyond 68, before those of working age get there (a worrying prospect). In general, we remain concerned that the current generation of pension savers are funding comparatively generous benefits for pensioners while facing difficult economic conditions as they try to provide for their own financial futures, and a lack of access to the valuable Defined Benefit pension schemes which previous generations enjoyed. In this light, we hope younger savers are not disadvantaged by future measures such as the removal of tax relief on their pension contributions, unless properly compensated by other measures.
Tax avoidance vs evasion vs planning
There was more rhetoric indicating the Chancellor’s hostility towards aggressive tax planning, straying into evasion. This has implications for - and highlights the unattractiveness of - many artificial and overly clever schemes which have sprung up on the fringes of the advice industry over recent years. This also stresses, in turn, the importance of taking good quality advice on well-established and mainstream tax planning, including the use of tax-advantaged wrappers like pensions and ISAs, regular allowances, and, for business owners, having a well-structured remuneration strategy.
Buy-to-let stamp duty - a plague on both your houses
The 3% stamp duty premium on second homes and buy-to-let properties will affect many of our clients who hold direct property investments. We anticipate that this measure, combined with the current environment for yields and house price growth, will lead to many private investors rethinking the role of bricks and mortar within their portfolio and we expect that clients may wish to revisit the position and discuss the available alternatives.