Pensions tax raid: government warned not to tinker

Tinkering with the pensions system could be more unpopular than expected, warns interactive investor’s Head of Pensions and Savings.

Commenting on the story in today’s Telegraph that the Government is considering further reforms of pension tax including:

•    Reduction of the Lifetime Allowance to £800,000 or £900,000
•    Equalising the rate of tax relief on pensions, which would involve higher rate relief being reduced
•    Tax on employer contributions 

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “We need more not fewer incentives to invest for retirement. 

“Tax relief and employer contributions are two benefits that make pensions the best way for most of us to put money aside for the future. If the Government chops away at them, workers face poorer outcomes in retirement. This could translate into more pressure on public services from a less financially secure older population in years to come.

“The Government should think hard before yanking away some of the few tools people have to look after themselves in old age. Although more people now have a workplace pension thanks to auto-enrolment, today’s workers are generally in far less generous pension schemes than those of previous generations because of the wholesale shift from defined benefit schemes, which guaranteed a level of income in retirement, to defined contribution schemes, which do not.

“People are also more switched on to their pensions these days. So while pension tax changes might be seen as a clever policy move that wouldn’t attract too much negative attention in former times; now, with workers paying more attention to their retirement pots, any tinkering could be more unpopular than expected.

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“The Lifetime Allowance (LTA), which is a cap on the amount you can take out of a pension before paying a tax charge, is already contentious at the current level of just over £1 million, because it penalises investment growth as well as contributions for those with larger pension pots. If reduced further, the LTA could go from being a niche concern to a more mainstream one, affecting millions more workers over the years as the performance of their investments drags them over the limit. £800,000 might sound like a lot now, but in 30 years, after decades of inflation, having this amount available in a pension could be a lot more common. 

“Curbing incentives means some people could also use pensions less and choose other ways to invest for retirement instead. It could become a free-for-all, with people taking more risks than might be appropriate on other investments to try to make up for any reduction to these benefits.”