Make the most of your pension – whilst you can

As usual, speculation surrounding Monday’s budget warns of potential cuts to tax relief that high earners currently enjoy on their pension contributions.

Tax Relief on pension contributions is estimated to cost the treasury £39 billion a year.  As the chancellor looks for savings to fund a pledge for a further £20bn a year into the NHS, pensions are once again a potential target.

In recent years pensions have been hit multiple times.  We have seen the Lifetime Allowance, the total amount you can build in a pension fund before facing hefty tax charges, fall from £1.8m to just over £1m today.  The amount you can pay into a pension each year has also fallen considerably from over £200k per year to just £40,000.

For many business owners pension contributions are a great way of getting cash out of their businesses in an extremely tax efficient way.  Contributions attract relief from Corporation Tax and are received by the business owner’s pension fund without suffering Income Tax or National Insurance Contributions.

It is possible we could see these allowances hit again, providing a way of cutting government pension spending in a relatively acceptable way.  The Chancellor could cut the current allowance of £40,000 to anywhere between £35,000 and £20,000 (it is doubtful he could possibly go lower). A small reduction to £35,000 could be seen as “a close call” in terms of clawing back money whilst not rocking the boat too much.  In fact many  people in the lower income stream may view it as socially acceptable, given that it will mainly affect higher earners who are in a position to make greater contributions.  A 50% reduction to £20,000 would, on the other hand, upset more than a fair share of people, mainly those in the higher earning bracket.

It is clear if any cuts are made, the Chancellor needs to be careful.   Attacking retirement savers too much could derail the Auto-enrolment project and the massive importance this has on weening the country off the hugely costly State Pension.

Ultimately, if saving into a pension starts to look unattractive, people may start to opt-out, the consequences of which could be huge.