Savers could lose third of pension in tax changes
MIddle class savers could lose up to a third of their pension pots if proposed changes to tax relief go ahead.
Chancellor George Osborne is trying to save billions by cutting the amount of tax relief the Government offers.
But analysts have warned potential changes would hit middle income workers hardest, and could see them miss out on tens of thousands of pounds.
Critics have labelled the plans a ‘stealth tax’, which could have a ‘disastrous effect’ on whether people can afford retirement.
A 40-year-old earning around £50,000 a year stands to miss out on up to £175,000 by the age of 65 if Mr Osborne scraps the tax relief perk altogether.
Other options being considered would see the same worker losing out on between £44,000 and £110,000 by the time they retire, according to pension provider Fidelity. Currently, workers earn- ing £42,385 or more – higher rate income tax payers – receive a tax free boost of £2 from the Government for every £3 they save into a pension. It means they typically get around 42 per cent more back than they invested when they retire, once income tax paid on withdrawing pensions is taken into account.
But proposed changes could see tax relief cut dramatically or scrapped altogether. In the worst cases, savers could lose money.
It is expected the Chancellor will choose to make the system fairer by changing the tax relief rates of 20 per cent for basic rate taxpayers and 40 per cent for higher-rate tax payers to a flat level of either 33, 25 or 20 per cent. Currently higher rate taxpayers only have to invest £60 to get £100 in their pension pot. But if tax relief is dropped to 33 per cent, they will receive just £90 for the same investment. This falls to £80 if it is cut to 25 per cent, and £75 if slashed to 20 per cent.
The Chancellor may even approve another proposal under consideration – to drop tax relief altogether and treat pensions like ISAs by allowing them to be withdrawn tax-free. But this would mean most people would not make any money from saving into a pension – so fewer workers would be encouraged to put money away for retirement.
Alan Higham, of PensionsChamp.com, said the changes could have a ‘disastrous effect’ on encouraging people to save.
‘It is a big stealth tax which will raise a lot of money from people who won’t always realise what is being done to them,’ he said. ‘People don’t look at their pensions in the same way they do their bank accounts... It means
‘Disastrous effect’
they are so easy [for the Government] to raid by reductions.’
Richard Parkin of Fidelity said: ‘It’s tempting to think of higher rate tax-payers as super wealthy but higher rate tax starts for those earning around £43,000. Changes to higher rate tax-relief will ...have a big impact on many people who’ve worked hard to get on.
‘It’s likely to mean that there’ll be less money going into pensions for these people which means they’ll have to save more or look forward to a less comfortable retirement.’
A Treasury spokesman said: ‘The Government launched a wide-ranging consultation on the system of pensions tax relief last summer. We have not decided on whether or how to reform the system and are considering all options, including retaining the current system... We are considering the responses and will respond at the Budget.’