Sweeping changes could be on the way to how we save for a pension, the Chancellor announced today.
In the Summer Budget, the Chancellor announced a 'Green Paper' consultation on pension tax relief. In potentially reforming the way people save into a pension, the Government's goal is that more people save more cash for their retirement.
Detail is very sketchy at the moment as this is very much in its first stages.
Currently, pensions are given tax relief at source – so if you're a basic rate taxpayer, for every 80p you put into your pension, the Government adds 20p.
Most gains on cash saved or invested within a pension are also tax free. But everyone taking income from a pension pays tax on the pension income.
One suggestion mooted was that this tax system is reversed, so pensions could be taxed like ISAs. This would mean you'd pay in income you'd already paid tax on, and then you would be able to take it out tax-free, along with any growth your savings had enjoyed.
However, the Chancellor was keen to stress that this is an open consultation, without a pre-judged answer.
If you would like to respond to the Government's consultation, the paper and how to respond to it can be found on HM Treasury website.
Higher earners' annual allowance for pension savings cut to £10,000
While the reform of pension saving is still open to a new solution, one group of pension savers won't be celebrating today.
The Chancellor also announced anyone earning £150,000 a year or more will see the amount they could save in a pension and still get tax relief cut.
Currently, most people saving for a pension can save £40,000 a year and receive tax relief on it (subject to not exceeding the lifetime allowance of £1.25m). You can also use any unused portions of annual allowance from the previous three tax years.
But, from April 2016, anyone whose total income, pension contributions and employer pension contributions is over £150,000 in a year will get a reduced allowance, with the very highest earners allowed just £10,000 of tax relief.
The reduced allowance will be tapered. Anyone earning £150,000 will get the full £40,000 allowance. From there, the allowance tapers downwards, with people losing £1 of allowance for every £2 of income; this means anyone earning total income of £210,000 or more will only get £10,000 tax relief annually.
Those whose income (excluding pension contributions) is under £110,000 will be unaffected by these changes, even if pension contributions take them over.
Pension Wise guidance service expanded
Separately, it's been announced today that the Government's free and impartial pensions guidance service, Pension Wise, will be extended to those aged 50 and above from today.
The scheme, which launched in April 2015, was previously only available to those aged 55 and above. See the Pension Wise website for more information on how it works and to book a free appointment.
Additional reporting by Helen Knapman.
