Budget 2020: Pensions – what does the future hold?

With Brexit now confirmed, a new government in place, and a brand new chancellor, the rumours are swirling about the future of pensions and the upcoming Budget.

And it’s no surprise that any word of pension reform hints at changes to tax relief.

According to the Financial Times, former chancellor Sajid Javid was said to be considering a ‘shake-up’ of pension tax relief to make the tax system “fair and efficient”.

It’s been suggested that the Treasury, under Mr Javid, was considering cutting the rate of relief for higher earners to 20%.

Why hit higher-earners’ pension tax relief?

The government spends more than £50 billion a year on pension tax relief (including national insurance relief) which previous chancellor Philip Hammond called “eye-wateringly expensive.”

Cutting the rate of relief for high-earners could, in turn, raise more than £10bn to help fund promises in Johnson’s latest manifesto, including more money for the NHS and police force. Any such change could turn the world of pensions on its head.

What to consider?

If you pay tax at a higher rate, the tax relief you get is a valuable pension benefit that shouldn’t be underestimated. If tax relief is cut on 11 March, the rule changes could take place immediately, or some time later. Anyone affected but didn’t act before the rule changes could potentially end up with a smaller pension pot.

If you are already thinking about making a pension contribution, pay tax at a higher rate and are concerned about any Budget changes, you could consider making the most of tax relief while you still can. You can do this by maximising your pension contributions this tax year. Remember, money in a pension is not usually accessible until age 55 (57 from 2028). Tax rules can change and benefits depend on your individual circumstances.

Find out more about pension contributions

How much am I entitled to?

With the current system, you can receive tax relief up to your highest rate of income tax.

When you make a personal pension contribution, the government automatically adds 20% in basic rate tax relief. For instance, to contribute £10,000, you pay £8,000 and the government adds £2,000.

If you pay tax at a higher rate, the tax relief is even greater so the effective cost is even less. You can claim tax relief above the basic rate up to what you actually pay through your tax return. The exact benefits will depend on your personal circumstances and are subject to change.

GET YOUR GUIDE TO PENSION TAX RELIEF

Find out how little your pension contribution could cost you, with our free tax relief calculator:

TAX RELIEF Calculator

This article is not personal advice. If you are at all unsure on the suitability of an investment for your circumstances, please seek advice.