Responding to the threat of cuts to pension tax relief

Annabel Denham
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AS GEORGE Osborne prepares for his much-anticipated Autumn Statement, rumours abound that he will cut pensions tax relief for higher-rate earners. The Chancellor is coming under increasing pressure to meet his debt targets during a time of sluggish economic growth and high public spending levels. And pensions are a likely subject for tinkering now that the Conservatives have ruled out plans to impose a mansion or wealth tax or higher council tax bands – all of which have been advocated by their coalition partners.

Investing in a pension is the most tax-efficient way to save for retirement. The amount you save each year towards a pension from which you benefit from tax relief is subject to an “annual allowance”, which, for the tax year 2012-13 is £50,000.

What is likely to happen, therefore, is that the pension allowance will be cut from £50,000 to £40,000, or even £30,000. Hargreaves Lansdown has said that a cut to £40,000 could raise an estimated £600m per year; a cut to £30,000 could raise £1.8bn per year – tempting for Osborne when you consider that public sector net debt was £1,068bn at the end of October 2012, equivalent to 67.9 per cent of gross domestic product.

In all likelihood, the Chancellor will wait until the end of the tax year to cut pension tax relief, but there is a possibility that any changes could come into effect immediately. So time is of the essence. But is hasty action your only option?

Investors who have missed contributions in previous years may be able to contribute up to £200,000 in one go using the “carry forward” rule. If you have used up all your annual allowance for the 2012/2013 tax year, you can carry forward any unused annual allowance for the three previous tax years 2009/10, 2010/11 and 2011/12.

If you want to make your money work a bit harder, Hargreaves Lansdown recommends putting your money into a low-cost self-invested personal pension (Sipp). Sipps offer a range of pension investment options, thus allowing you to diversify your portfolio. They also give you a lot more control – you can invest almost anywhere, from gilts to investment trusts – and you can make investment decisions when you want.

Sipps have the same tax treatment as other pension arrangements. There is no capital gains tax on the pension investments within a SIPP, aside from dividend tax credit of 10 per cent. But they don’t let you access the money in a pension until at least age 55, when you can take a tax free lump sum of up to 25 per cent of the value of the Sipp.

There are some risks involved with a Sipp, however. As Killik advises, “individual pension investments are subject to fluctuation and you may realise less than the sum invested in your SIPP”. In addition, the tax treatment of pension investments and tax wrappers – including SIPPs – may be suject to change.

There is still time before Wednesday to top-up your SIPP or set up a new one with a contribution before 5 December. As most advisers put it, “pensions are the essential part of people’s long-term planning”.

Which is why doing what you can as soon as possible is the wisest move.