The importance of putting money into a pension cannot be understated, and the British government has a regulation in place – the pension tax relief scheme – to encourage people to save. But many experts are predicting significant changes to the scheme. If you’re planning to retire overseas as an expat and take advantage of international pension transfers, you’ll need to stay updated with these changes.
How does pension tax relief work?
The pension tax relief scheme is an incentive to entice people to put money into their pension pot. To reward people for thinking ahead to their retirement, the government currently tops up their pension contributions based on the rate at which they pay income tax. So, basic rate taxpayers will receive 20 per cent tax relief (meaning they only need to pay £80 into their pot to get £100), while higher rate taxpayers are entitled to 40 per cent relief.
As you can imagine, this is a significant financial undertaking for the government. Data from HMRC shows the exchequer paid out £38.6bn in 2016/17 (a slight increase on the previous year’s total of £38.5 billion, suggesting that the cost has stabilised), and many feel that the expensive system is unsustainable.
Are tax relief reforms likely?
The current form of the pension tax relief scheme certainly has its critics. Speaking to the Financial Times, Labour peer and pension industry expert Jeannie Drake said she believes there is a compelling case for tax relief to be reformed so that, instead of different relief rates based on income, a flat rate would be introduced, increasing the amount lower earners can save but reducing the amount for those on higher salaries (the government previously considered taking this measure in its 2015 review).
But not everyone is so welcoming of an overhaul. Royal London director of policy and former pensions minister Steve Webb commented that the pension tax relief scheme is often viewed as a “honey pot” by chancellors, “convenient to dip into whenever they are short of money”.
However, Webb said that the high number of cuts to pension tax breaks in recent years has undermined people’s confidence in pension saving and believes that the chancellor should refrain from making further changes to tax relief for the duration of this current parliament so savers can “plan with confidence”.
As Webb mentioned, cuts for wealthier individuals have occurred in the past.
The annual allowance (the amount contributed to a pension scheme receiving tax relief) was slashed from £255,000 to £50,000 in 2011 and then down again to its current value of £40,000 in 2014 (and high-income individuals with income over £150,000 will have their allowances reduced even more).
Furthermore, the lifetime allowance (the limit on the amount someone can withdraw from their pension without facing extra tax charges) has seen several reductions over the past few years, reaching a low-point of £1m in 2016.
So, with the growing likelihood that higher earners could soon see drastic cuts to the amount of tax relief they receive on their pension contributions, it makes sense for them to make the most of the current system while they still can.
Making the most of your UK pensions savings
Pension tax relief is by no means simple, and it’s hard to say who will be affected by future changes until any measures have been set in stone. Whatever your pension concerns may be, and whatever the future holds for the pension tax relief scheme, Blacktower’s financial advisers can help guide you in the right direction when it comes to your personal expat pension planning.
If you are saving for your pension in the UK, we provide advice on how best to handle your entire pension pot. We can answer questions on tax relief and the best way to manage your retirement savings.
For example, you may wish to pool your pensions into a SIPP and we will take the time to analyse your current pension savings to help you make the most appropriate decisions in relation to every aspect of your retirement investment planning.