High earners could see their retirement pots reduced by hundreds of thousands of pounds over a lifetime after the chancellor confirmed that pensions tax relief will be reduced for those earning more than £150,000.
The government has pressed ahead with plans to progressively reduce the annual amount those earning over £150,000 can contribute tax-free to a pension each year.
At present, anyone paying in to a pension is entitled to tax relief on contributions of up to £40,000 a year. From April 2016 this will be gradually reduced at a rate of £1 for every £2 earned over £150,000, until the tax-free limit hits £10,000.
The move is designed to pay for new cuts to inheritance tax, which will see the amount that someone can leave to their children tax-free increase to £1m if it includes a family home.
Dean Mirfin, technical director at retirement specialists Key Retirement, said the move would put wealthier people off saving into pensions.
“The change in the annual pension contribution limit for those with incomes over £150,000 may seem trivial but older workers who are trying to fund their pensions in the lead up to retirement, who have good levels of income, will be punished at a time when they should be encouraged to contribute as much as possible,” he said.
Tom McPhail, head of pensions at financial advisers Hargreaves Lansdown said anyone who is affected by the change who hasn’t already built up a decent-sized pension pot had been dealt “a big blow”.
He cited the example of a 40-year old earning more than £150,000, who currently has a pension fund of £200,000.
“The reduction in the annual allowance to £10,000 means the projected pension fund for this person at age 67 is going to now reduce, in real terms, from £1.45m to £552,000,” he said. “It is these middle-aged people, rather than those reaching retirement, who are being dealt a particularly big blow.
Coming in a year that has witnessed the biggest shake-up to pensions in more than a century, the chancellor also indicated he might be willing to go further with reforms to retirement savings.
He said the recent pension freedoms had helped those who had “worked hard and saved hard all their lives” but that now it was time to look at those starting to save.
“For the truth is Britain isn’t saving enough and that’s something we need to fix in our economy, too,” he said. “While we’ve taken important steps [...] I am open to further radical change.”
He said he was considering taxing pensions like Isas – where contributions are paid from taxed income but money is tax-free when it comes out.
He said the idea needed “careful and public consideration before we take any steps” and has announced a consultation into it that will run until the end of September 2015.
“The consultation paper says that any system should be simple, transparent and sustainable, and asks questions rather than recommending a solution,” said McPhail. “However, taken in conjunction with the changes already announced today, I think further change is inevitable and that this is the beginning of the end of the existing pension tax-relief system.”
There had been some speculation that the government would announce more details of its plan to allow existing annuity holders to have the freedom to sell their annuity income. However, these plans will now be announced in the autumn with the implementation of a secondary annuity market put back from 2016 to 2017.
