What The 2015 Conservative Budget Means For Pensions
As the first all-Conservative budget in years has been unveiled by George Osborne last week, one figure stood out: £12 Bn. That’s the sum of spending cuts scheduled by the Conservatives in this new budget. Pensions will not be exempt from this fiscal trim.
As pensions are a significant cost centre for the government’s budget, they have become a sitting duck in the hunt for excessive government spending. This time will be no exception. Here below are five ways the budget numbers could impact pensions:
Pensions tax relief cap for high earners
What was previously considered a generous perk for high earners is expected to come to an end. Those earning more than £150,000, which marks the start of the 45 per cent tax bracket, face a cut in pension tax relief.
Currently, the highest tax-free amount these earners can contribute to their pensions each year is £40,000, but this is expected to be brought down to £10,000 via a sliding scale according to the amount earned. The £10,000 figure will be hit once a person has a salary of £210,000, beyond which point the relief will decline no further.
Limit on lifetime pension relief
This change affects everyone, although most of all high-earners. The maximum you can place in your pension tax-free over your lifetime is expected to be reduced to £1m – down from the current level of £1.25m.
Flat rate pension tax relief for all
Some experts believe the government might introduce a 30 per cent flat rate of pension tax-relief, helping to make the system easier to understand and operate.
Currently, the system is more in favour of high earners, as the pension rebate received increases according to the tax bracket we fall into. Tax rebate varies from 20 per cent among the lowest tax-bracket earners, to 45 per cent among the highest earners.
No tax relief on a lump sum taken out earlier
People are able to access a maximum of 25 per cent of their pension pots as a cash-free lump sum aged 55, ahead of the remainder becoming available at the normal retirement age of 65. It is thought Osborne could rule out any tax relief for that first chunk. Savings experts argue taking the lump sum early can result in a financial loss for the individual, however.
End of employer pension plans relief
At the moment, employees can be granted National Insurance relief or salary sacrifice, where the company they work for pays part of their salary into a pension via a contribution scheme. This is subject to change as well.