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The Treasury has issued a consultation document on pensions tax relief, as mentioned in the June Budget, which has been described as ‘good news’.
According to investment management provider Hargreaves Lansdown, ‘the good news is that the consultation document proposes to restore full tax relief on pension contributions at investors’ full marginal rate. Unfortunately, the trade-off of a reduced annual allowance is likely to hasten the demise of final salary pension schemes.’
The Treasury has proposed:
- reducing the annual allowance to between £30,000 and £45,000;
- reducing the lifetime allowance of £1.5 million;
- tightening the valuation basis of final salary benefits, which may result in more final salary scheme members incurring a tax charge for exceeding the annual limit;
- restricting tax relief to 40%; and
- removing the concession allowing uncapped pension contributions in the final year before retirement.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the proposals were ‘broadly good news’ for pension investors because they ‘restore simplicity to the system and will encourage investors to provide for their retirement’.
He added: ‘The consultation document proposes exemptions and allowances to avoid scheme members being caught out by one-off spikes in their pension accrual. We believe that some pension scheme members and their employers will conclude that by comparison, the simplicity and transparency of money purchase pensions is more appealing.
‘However, the tentative suggestion in the consultation document to restrict tax relief to 40% is not one which will find favour with the pensions industry. We expect it to be rejected,’ he said.
