Future-proof your pension

How to beat the potential savings raid

The lifetime cap on pension savings will be abolished from April next year, under Tory reforms designed to encourage more over-50s to return to the workforce. The overhaul was announced in the Budget on Wednesday.

It means savers can contribute to their pension – and benefit from government tax relief – without incurring a penalty.

However, Labour has pledged to reverse the reforms for everyone other than doctors if it comes to power at the next general election.

So, how should savers prepare for a change of government?

Q How can I make the most out of the reforms?

A Under the current rules, any savings that breach the lifetime allowance of £1.073 million are taxed at 55 per cent if the money is taken as a lump sum, or 25 per cent (on top of income tax) if taken out gradually. Any pension savings in excess of the allowance not used by the age of 75 are taxed at 25 per cent.

While experts have warned that it is unlikely that Labour would impose a retrospective tax on savers who benefit from the removal of pension caps, the next 12 months could prove crucial in maximising allowances. Rebecca O’connor, of the provider Pensionbee, noted that under Jeremy Hunt’s reforms, the annual allowance, which caps how much you can save tax-free into a pension each year, is set to rise from £40,000 to £60,000 in April.

“Carry-forward rules, which enable people to use their unused annual allowance from the previous three tax years, are in place, so not only could you make contributions, including tax relief and any employer contributions, and up to £60,000 for the tax year 2023-24, you could also look to use up unused annual allowance from earlier years,” she said.

Q What are the risks?

A Hundreds of thousands of workers may be tempted to maximise contributions while the lifetime allowance is lifted and then retire just before the general election. However, David Hearne, a financial planner, based in Berkshire, noted that any reversal of the reforms could take much longer to come into force.

“It will take time to change legislation, let alone help pension providers prepare for such a significant change,” he said. “I would urge people not to act quickly on what at the moment is still speculation.”

Q Should I borrow money to pay into my pension?

A Rachael Griffin, of the wealth manger Quilter, warned that while pensions were an attractive way of investing, in most cases it would not be wise to borrow money to contribute more.

“Pension investments are subject to market risks, and returns are not guaranteed. Taking on debt to fund a pension could lead to financial strain if investments underperform, as the individual remains responsible for repaying the borrowed funds,” she said.

“More often than not, the costs of obtaining a loan are higher than the expected returns and tax savings from pension contributions, resulting in a net loss.

“Repaying a loan requires sufficient cash flow, which can be challenging if your pension savings are locked away until retirement.”

Ms Griffin warned that some pension providers and regulators may impose restrictions on using borrowed funds for pension contributions.

Q How else can I beat the tax raid?

A Mr Hearne noted that in some cases it may work in savers’ advantage to prioritise investing into their pension rather than paying off low-interest debts. “For example, if you are under the age of 55 and on a low fixed-rate mortgage, then it may be better to use spare cash to make additional pension contributions,” he said. “Your cash will get tax relief, then you can take your cash free lump sum and clear your loan afterwards.”