Personal Finance: The pension problem
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Are pensions worth the bother? As employers close their pension schemes and stock markets have plunged, the pensions crisis has worsened. Pensions were traditionally a key part of financial planning, especially as our state pension is about the lowest in the developed world. In fact, Britain has more money in private pensions than the rest of Europe put together. However, increasing numbers of people have abandoned pensions. Many will regret this in years to come. Although not right for everyone, pensions can still offer tremendous opportunities.
Pensions are a special kind of savings — a “locked box” — where you put money in regularly, and cannot touch it till later life. Younger people with debts, on basic rate tax or with no employer contribution, may not be best advised to lock money into pensions. Unless they can manage without this money, saving first in an Individual Savings Account (ISA) and transferring to pensions later may be better. However, for higher rate taxpayers, pensions offer a great deal. So great, in fact, they are under threat.
Pensions are very tax efficient. Every £3,000 higher rate taxpayers contribute to their pension gives them a further £2,000 in tax benefits. Many have built up significant pension funds, but in the last budget, the government launched a surprise attack to limit top earners’ pensions. This could herald a war against pension tax breaks. The Chancellor pointed out that one quarter of the £30 billion a year cost of pensions tax relief is spent on the top 1 per cent of earners (those earning over £150,000) and announced severe restrictions on pension tax relief for this group. Instead of being allowed to put in 100 per cent of salary, they may only receive higher rate tax relief on annual contributions up to £30,000. People earning below £150,000 can still contribute much more, but a government desperate to raise revenue may be tempted to further limit pension tax breaks for all top-rate taxpayers in future.
What’s more, the Treasury sometimes refers to the tax free lump sum available to retirees in their fifties as an “anomaly”. This tax-free element of pensions could, therefore, be taken away, which might suggest considering taking your pension sooner rather than later. Becoming non-resident offers another pension-tax wheeze. Currently, non-residents can virtually avoid paying any tax on their pensions by moving into Qualifying Recognised Overseas Pension Schemes (QROPS), but there are attempts to stop this. So if you want the tax benefits of pension saving, you should probably discuss the future with an independent financial adviser. Top earners’ pension advantages could come increasingly under threat. Better to be prepared than to be taken by surprise, as so many were a few months ago.
Ros Altmann is a former government pensions adviser