Mostly benevolent but a trap for the unwary

The Autumn Statement included few surprises and was largely benevolent for savers, but there were some traps for the unwary says Kay Ingram, director at LEBC.

Mostly benevolent but a trap for the unwary

Most changes announced in the Autumn Statement were minor technical tidying up measures.

Changes mooted had included:

  • Removal of the triple lock increase on State pensions which guarantee an increase based on the highest of increases in prices, wage rises or 2.5%.
  • A flat rate of tax relief on pension contributions for all savers, so that basic rate payers might receive more and higher rate taxpayers less.
  • A reversal of the cut in capital gains tax now at 10% and 20%.

None of these changes were introduced and should be largely welcomed by savers and in particular State pensioners.

Consultation

The Treasury has however launched a consultation on further changes to pensions savings tax relief which would apply after an individual has accessed their pension savings.

For most people up to £40,000 a year can be saved in pension schemes with the benefit of tax relief at the taxpayer’s top marginal rate. High earners (those with earnings over £110,000) have restricted allowances.

This changes after money is withdrawn from existing pension savings on a flexible basis, once the withdrawal exceeds the tax free lump sum of 25%, any amount withdrawn will be taxed and will also restrict future pension savings tax relief to £10,000 per annum. The Treasury now wishes to reduce this allowance to £4,000.

If this were to be adopted it could remove some of the attraction of flexible access to pension savings. Further reducing the ability to rebuild savings later with the benefit of tax relief on those savings would hamper many older workers seeking phased retirement.

Impact

The impact of this change is most likely to be felt by those just about managing who take a large withdrawal from their pensions to deal with a short term emergency. Especially if they do so without taking advice, they may not realise till it is too late, that their ability to save tax efficiently in future has been thwarted.

The Treasury is considering this change due to concerns that some taxpayers could take advantage of flexible access rules, by recycling money withdrawn into their pensions thus getting tax relief twice. In practice there is little evidence of this.

If the proposal is implemented, those savers facing short-term difficulties who draw on more than the 25% of pension fund paid tax free could lose thousands of pounds of future tax relief.

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