At first, George Osborne seemed pension savers’ best friend. ‘Pension freedoms’ – the ability to take money from pensions however you like – were probably the only pension good news most can remember.
Then came the sneaky U-turn.
Osborne hasn’t taken away pension freedoms, but appears intent on making them meaningless. If he has it his way, there won’t be much money to take from most people’s pensions at all.
High earners’ pensions are the first casualty. From April 6, the amount those earning £150,000 or more can put into pensions each year will fall dramatically from £40,000 to as little as £10,000.
To add perspective, an annual £10,000 contribution could give a pension pot worth £309,000 after 20 years (assuming four per cent net growth) and provide an annual income of around £16,000 – just £200 a month more than current minimum wage.
Moreover, the lifetime allowance – the amount that can be held in pensions without being savagely taxed – will fall to £1m from 6 April.
If you cannot summon any compassion for the mega-rich, you might need to think twice. The new restrictions affect a surprisingly large number.
For instance, someone with a successful career and a final salary pension paying annual income of around £50,000 may be close to the reduced lifetime allowance. If they keep accumulating benefits, they won’t get a gold watch at retirement, but a hefty 55 per cent tax charge.
Next in the firing line may well be higher-rate taxpayers – 4.65 million people.
Mr Osborne is widely expected to abolish higher-rate pension tax relief and introduce a flat rate – 25 per cent or 33 per cent – on 16 March.
Additional-rate taxpayers could be £70,000 worse off. So where can hardworking savers turn?
Research indicates 65 per cent of higher and additional-rate taxpayers affected by the pension changes are considering VCT, EIS and SEIS investments.
These are government-endorsed tax-incentivised schemes investing in small – and typically riskier – companies.
Small companies are the lifeblood of the economy. The government wants us to invest in them – and is prepared to pay in the form of tax relief – between 30 per cent and 50 per cent, up to £410,000 per tax year across VCT, EIS and SEIS.
The allowance is substantial – a total of £1.3m per tax year. There’s a catch though: these products are not for everyone.
If Osborne perseveres in making pensions uninvestable, will VCTs, EISs and SEISs become the new supercharged pension for high earners?