Pensions Tax Relief Under Threat

Updated : Sep 01, 2019 in Articles

Pensions Tax Relief Under Threat


Hello and welcome to the Morningstar Series
‘Ask the Expert’. I’m Emma Wall and I am joined today by Julian Webb, Head of Workplace Savings
with Fidelity. Hi, Julian. Hi, Emma. So tax relief on pensions is changing. Before
we get into the changes let’s talk about what is available to people now. Okay, so the principle of saving for your
retirement is that you receive tax relief on the way in. You receive tax relief on your
investments and then you pay tax on your marginal rate, when the actual pension income is paid
to you. So that then means that if you are basic rate
tax payer and you put an 80p you get 20p on top of that and if you have any dividends
that get reinvested, you don’t pay capital gains tax, you don’t pay income tax. It’s
all safe within that wrapper. That’s right and that’s been the system
that we’ve had for many, many years. And in fact it’s the global system. So it’s a
system that most pension savers are incentivized with. And as you said this may be changing
because the government have issued this consultation paper to ask the industry and employers and
indeed you and I as investors in pensions, what our views are in terms of how we should
be incentivized to save for our retirement. It does sound a bit mean to change it. As
you say it’s been a system that’s been there for a while it the global system and several
government initiatives in recent years have been encouraging us to save for our retirement
things like auto-enrollment. So why now, why are they proposing these changes. I think the key driver behind this is that
Treasury have identified a large amount of money is invested in terms of pensions tax
rate, some GBP35 billion a year, which is equivalent to 8p on the basic rate of tax.
So it’s a big investment that the government are making. So I think understandably they
are reviewing this to say well, actually is it working as well as it should. So I would
say actually they seem to be quite genuine when they say this is the Treasury that in
the consultation it is wide open, including the status quo. So it may not change although
I think it’s highly likely that there will be some form of change. And obviously we don’t know what the review
is going to conclude. But do we know some of the things that have potentials on the
table? So one is status quo. So no change at all.
I think another one would be the continuation of reducing the tax relief for high earners.
We’ve already seen the government move in that direction over recent years and in fact
they have gone even further more recently particularly for those that earn over GBP150,000
where that benefits will be tapered down to just GBP10,000 a year. So a big, big change
for the high earners. I think another one that is potentially under consideration is
the harmonization of the percentage of tax relief. So as you said earlier 20 pence in
the pound for standard rate tax payers. 40 pence in the pound for higher rate tax payers. So there is some discussion about whether
that should be equalized to say 30 pence in the pound and probably the more radical one
that’s being discussed at the moment is whether actually the principle of tax relief
on the way in and then tax relief on investments and then being taxed on the way out should
actually be reversed. So pensions become like ISS. So you pay into the product after you
have paid tax and then you receive tax accumulation free and then you effectively have the proceeds
free of tax. So potentially pensions could work like ISS from a tax relief perspective. From an investors point of view it seems that
pensions are forever being tinkered with. We’ve had allowances both life time and annual
allowances tinkered with relief is now potentially being changed. I mean do you not think that
this makes some investors just think, oh you know what I am not going to bother. You are right there has been huge amounts
of change and I think what we got to be very careful about is not to undermine the confidence
in pensions. I think auto-enrollment has been a great success. I think confidence is back
into pensions and pension savings. There has been lot of simplification that has occurred.
So a fundamental wholesale change would have to be worked through very carefully not to
undermine people’s confidence in pensions. Because we need more people to save more for
their retirement, not for them to be disenfranchised and opt out of pensions. With that in mind are there any action points
from this review, obviously we don’t know what the conclusion is going to be. So should
people just carry on diligently paying into their workplace pension and their SIP as well
if they can afford it? Absolutely so there is tax relief available
today hopefully that will continue to be a key incentive for people to save for their
retirement. So what I would say is that if you can access additional contributions from
your employer. So for example a matched contribution you should absolutely consider taking advantage
of that, and just generally trying to pay into your pension, the highest rate that you
can afford. Julian, thank you very much. Pleasure. Thank you. This is Emma Wall from Morningstar. Thank
you for watching.

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