Post-election raid on pensions likely

Much financial talk over the last year has been around the revolution in pensions, with the liberalisation of the rules to allow much greater pensions choice on retirement.

However, it looks as if pension benefits for the wealthy will be hit after the election, whoever gets in.

Following on from last month’s budget, which saw the lifetime allowance reduced to £1m with effect from April 2016, the Conservatives have now announced that, if elected, they would reduce the pension contributions for people earning more than £150,000pa.  

Currently, 45%-rate taxpayers receive up to 45% tax relief, which means that a £10,000 investment for retirement can cost as little as £5,500, assuming sufficient tax has been paid at the 45% rate - the exact benefits will depend on individual circumstances.

At the moment, investors can also contribute up to £40,000pa into their pension, or as much as £180,000 if they have unused allowance from previous years. To receive tax relief, contributions must not exceed earnings.

The Conservatives now plan to reduce the allowance for those earning more than £150,000. As income increases, the allowance will fall, which means that anyone earning £210,000 or more will now have an allowance of just £10,000. Contributions up to the allowance will receive full tax relief (up to 45%), but contributions over the allowance will effectively receive no tax relief.

Labour, in the meantime, plans to limit tax relief to 20% for anyone who earns over £150,000. They also plan to reduce the annual allowance from £40,000 to £30,000 for all investors.

The Liberal Democrats have discussed the introduction of a single rate of tax relief for everyone, possibly a rate of 33%.

Whilst no party has stated how soon they would make changes, it is expected that they could happen quite quickly. It should be remembered that an emergency budget was called a mere six weeks after the last general election.

If that were to be repeated, and tax relief is targeted, it only allows a short time for investors to make pension contributions and benefit from the current levels of tax relief. It might therefore make sense for some to act now and to bring forward any planned contributions for this tax year.

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