How to boost your pension with tax relief

In a report published in the last couple of weeks by the Pensions Policy Institute director Chris Curry says that there is “little evidence” the £35bn a year spent on tax relief on pension contributions actually encourages pension saving among low and medium earners.

The Institute has gone on to say that pension tax relief is “poorly understood” by savers and also favours higher rate taxpayers.

In response a Treasury spokesperson said “Pensions tax relief is designed to encourage and support saving for retirement, and that is why we offer a generous level of tax relief on pension contributions and investment growth.” They went on to comment that “the Government understands that the cost of tax relief is rising, and there is a legitimate public debate to be had about how the Government can best support people to plan for their future.” Additionally, it was said that “We therefore welcome the PPI’s report on tax relief for pension saving in the UK as part of a debate about the wider role for Government in supporting saving for retirement.”

The report has looked at alternative pension tax regimes, including introducing a single-rate of tax relief at 30 per cent and capping the tax-free lump sum people can take at retirement at £36,000. This idea which has been around for almost a decade now and the Treasury reaction to the report has been regarded as more than warm. In this era of squeezed public finances it is right that the Government reviews all tax incentives and how effective they are.

Currently, contributions and investment gains are exempt from tax and pension payments are tax relieved at the individual’s marginal rate. This is subject to an Annual limit of £50,000 worth of contributions. Savers can also take up to 25 per cent of the accumulated fund tax free. Whilst the gains within the pension is tax free, the Dividend income that Pension funds receive is received net of a non-reclaimable tax credit.

Chris Curry also says that “The current system of pension tax relief favours higher and additional rate taxpayers. Pension tax relief on lump sums, at an estimated cost of £4bn a year, is similarly uneven. While only 2 per cent of lump sums are worth £150,000 or more, they attract almost one-third of tax relief on lump sums.”

Already the Government has made a series of changes to the pension tax system. These include from April 2011, the yearly cap on tax-free pension contributions was reduced from £255,000 to £50,000, while the lifetime allowance was lowered from £1.8m to £1.5m the following year.

It has been confirmed that from April 2014 these figures will be lowered to £40,000 and £1.25m respectively.

Clearly this valuable Tax relief is under scrutiny but whilst this is the case the Government is committed to encouraging people to make their own provisions for later life. Tax relief forms a major incentive in this aim.

The call to potential new savers is to get your plans in place as soon as you can, the earlier you start saving the more you will be likely to have in place for later life.

For those already saving- make sure you regularly review the levels of your payments and also, be aware where your money is invested.

If you would like a free, unbiased review of you pension situation contact me on 0161 928 2706