HIGH EARNERS remain in the dark over how much they will be able to invest for their retirement following yesterday’s emergency Budget.
Chancellor George Osborne scrapped new rules due to come into force from April next year – which would have slashed pension tax relief to 20 per cent from 40 per cent for those earning £150,000-£180,000, but pledged to protect the £3.5bn in revenues this policy was set to raise.
The government is now consulting on a new annual allowance for pension contributions of between £30,000 to £45,000 – a significant reduction from the current £255,000 annual allowance.
The consultation, which has no timetable yet, was widely welcomed by the pensions industry which said it would make the pensions tax relief system less complex.
But Marc Hommel, pensions partner at PricewaterhouseCoopers warned the new regime would effect more people than previously expected.
“The Annual Allowance will need to be reduced to around £30,000 a year to raise the required annual tax revenues of £3.bn, which means more employees will be affected than under the previous government’s proposals. For example, a 50 year old employee earning £100,000 who is in a typical final salary scheme could be around £6,000 worse off,” he said.
The government also yesterday scrapped rules compelling pension savers to buy an annuity at the age of 75 from April next year.
As an interim measure the age will be effectively raised from 75 to 77 to ensure those turning 75 before then will not be disadvantaged.
The government will now begin a short consultation period to determine the minimum and maximum limits on income taken from a pension fund, and what inheritance tax charges should be applied to the funds of those who don’t buy an annuity.
Meanwhile, from next April the basic state pension will be linked to earnings, rather than prices, in a bid to ensure the value of this income keeps pace with inflation. Pensions will rise by a minimum of 2.5 per cent or in line with earnings or prices, whichever is greater, said Osborne.