End of 40% tax relief on pensions?

baby_boomer · 15 April 2009 at 12:16PM

It has been floated in the press that this is a possibility for next week's budget - netting the government an estimated £5.8bn.

Would the government dare to implement it in this tax year - when they are already stinging middle income earners for £400 pa by increasing the limits on National Insurance levies?
Wouldn't they be giving up on London seats in the next election as a result?

I have to declare an interest. Because I am a higher rate taxpayer for one salary year - but effectively for two tax years (2008/9 and 2009/10) - this could cost my family £5K in extra tax if implemented for 2009/10

Any thoughts? Apart from EdInvestor asking why I was stupid enough to think of investing in pensions anyway :rotfl:

I can see Gordon doing it because we are collectively in hock for a generation, it would appeal to Labour's core vote and also set the Tories a challenge of finding alternative revenue sources if they opposed it.

Personally I approved of Ros Altman's idea - floated in less challenging times - of abolishing higher rate tax relief on pensions but using the money saved to provide an extra boost to basic rate taxpayers saving for a pension.

"Looking on the bright side", it shouldn't be too many years, given the state of the public finances, before basic rate taxpayers will be able to get 25% tax relief on pension contributions without any extra help

.

whu · 15 April 2009 at 12:20PM

I read about this also - it will have an affect on me too - if it comes in people will try to put as much in their pensions as possible to get the max tax relief before it is reduced- I have aslo read that higher rate tax for those earning over £150K (which I am not!!) may have to pay 45% tax - bet they won't be able to claim 45% tax relief on their pension contributions!!

baby_boomer · 15 April 2009 at 12:26PM

whu wrote: »

I read about this also - it will have an affect on me too - if it comes in people will try to put as much in their pensions as possible to get the max tax relief before it is reduced

Exactly - which is why I fear that they may introduce it for 2009/10. Otherwise tax revenues will actually drop as 40% taxpayers make their last ever contributions under preferential conditions.

The proposed 45% band comes in in 2010/11, I think, which may help any decision to delay it for a year.

I just fear that this could be Gordon's legacy to the nation as he thinks about how history will view him. Plus New Labour ministers have all made plenty of extra contributions to their own pensions under the existing rules - so they won't be affected.

The only reason they won't do this, IMHO, is if they think it would harm their chances at the next election.

If it does come in it will decimate pension provision IMHO. Perhaps the wall of money could even be enough to kick- start a buy-to-let revival

Pee · 15 April 2009 at 12:38PM

But I don't think it would harm their chances. Obviously I'm looking at it from the perspective that that is never going to bother me, so I don't care much. I agree that is not right, but it is what we all do.

I think there are a lot of voters who would never be bothered by that change, in fact, it seems one of the more harmless ones that I can imagine. Sorry.

baby_boomer · 15 April 2009 at 12:39PM

Fair comment. I'm sure that's a perspective that Gordon will be considering, and trying out on his focus groups this week.

There are many more extra £billions that have to be raised somehow - in order to keep the financial markets happy and government debt serviceable.

And Gordon is already credited with wrecking the UK pension industry by taxing dividends held in pension plans. So why not go the whole hog?

It will, however, seem an extra kick in the teeth to private sector workers with Defined Contribution Pension plans who have seen 40% drops in the value of their pension pots over the last 18 months, while MPs & Ministers sail on regardless - protected from both future inflation and current market conditions by taxpayer subsidies

This measure would effectively prevent them repairing the damage wreaked by the current financial crisis.

dunstonh · 15 April 2009 at 1:02PM

We had a thread on this about two weeks ago. So, I apologise for the repeat....

Higher rate relief has been rumoured to be removed for the last 20 years. It pops up every now and then and goes away just as quickly.

It used to be said that it wasnt worth removing higher rate relief as it would cost more to implement that than the tax it would save. However, there are a couple of things this time round which make it more of a rumour than it previously has been:

1 - The NPSS/Personal account slated for 2012 has no provision for higher rate relief. Are the Govt going to want to launch a scheme where employers using personal pensions get higher rate relief for their employees (where applicable) but employees using the Govt backed scheme do not?

2 - Labour like buying votes and even if its not financially sensible to do it, killing higher rate relief will be popular with low net worth individuals. Those that are more likely to vote Labour. You can almost picture Gordon Brown saying that we wont be giving these fat cat bankers higher rate tax relief any more. Despite the fact that most higher rate taxpayers are small business owners in "middle england" and don't earn mega bucks and employ people and bring real worth to the economy.

The removal of higher rate relief would kill of pensions for a whole segment of consumers. Maybe that is needed. Whilst there isnt too much wrong with money purchase pensions at the moment, a rebranding and repackaging may be whats needed. A lot of consumers are stupid enough to fall for rebranding where a new product on a new name sells more than the old one despite it being exactly the same thing.

baby_boomer · 15 April 2009 at 1:15PM

dunstonh wrote: »

We had a thread on this about two weeks ago. So, I apologise for the repeat....

No, I apologise dh

. Could you please give us a link to this thread which I missed?

EdInvestor · 15 April 2009 at 1:43PM

Babyboomer should direct his ire at |ir Fred Goodwin, who has handed the Govt the opportunity to end higher rate tax relief on pensions on a platter.This despite the fact that he wouldn't have received the relief himself, as his pension was an ineligible FURBS, being so gigantic.

BTW a surprising number of higher rate taxpayers don't claim their extra tax relief because it has to be done through self assessment, not PAYE, and they don't realise.So they won't even notice.Nobody else will care a damn.It's a pretty easy way to raise a sizeable sum.

The main victims will be the life companies - but recent performance of many people's pensions has been so dire that this was a likely development in the immediate future anyway.

MikeJones_2 · 15 April 2009 at 2:50PM

Hi baby_boomer,

baby_boomer wrote: »

No, I apologise dh . Could you please give us a link to this thread which I missed?

The post which dunstonh refers to is:

http://forums.moneysavingexpert.com/showthread.html?t=1603665

Hope that helps.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

DavidLaGuardia · 15 April 2009 at 3:23PM

With the country facing a massive shortfall in pension provision, removing what incentives remain is truly assinine.

Furthermore, if higher rate tax relief were to be removed and the tax to be taken from benefits were not capped, a pension would be a loss making excercise for those paying 40% tax when they take the benefits.
80% cost plus 20% tax relied on contributions.
Benefits: 60% of 75% plus 25% tax free cash = 70% back
...and that's with the restriction imposed on the funds as well.

Are the LibDems really proposing this as mentioned in a previous thread?

As stupid as it seems, many retirees already suffer from a negative position on pensions.
Firstly their is the band in which they lose their age allowance that means basic rate tax payers suffer a true marginal rate of 30%.
Secondly for lower earners who have made a small provision, pension credit is also lost.

Better invcentives not fewer should be applied to ensure people save for retirement.

baby_boomer · 15 April 2009 at 3:26PM

I guess in the short term the government might think that more money would stay outside pensions so it could still be taxed at the top rate?

Looking back on past austerity budgets, you can hardly follow the example of 1932 and cut 10% of unemployment benefit & all public sector wages (although that would save far more in 2009!) as well as slap a 10% tax on all imports.

So the government is bound to look elsewhere.

And pensions are somewhere the future whereas the funding crisis is definitely in the present.

End of 40% tax relief on pensions?

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