Pension savers dodge a Budget hit
Chancellor resists cuts to tax relief on payments into retirement pots
Pension savers will keep their tax breaks after Chancellor Philip Hammond resisted butchering the popular incentives to raise cash for other pet projects.
It was feared a major overhaul was on the cards - which could penalise older or richer savers or both - to fund a giveaway to young people.
The spectre of a raid on pensions tax relief, which at present allows everyone to save for retirement out of untaxed income, has haunted savers for years.
The Government is believed to have pondered options such as moving to a 'flat rate' system where all savers get exactly the same rebate, and introducing a new 'Pensions Isa' where everyone saves out of taxed income and less money goes into pots as a result.
Most recently, a plan to slash pension tax breaks for older people and raid this cash to help the young is thought to have been on the Treasury's agenda.
But pension experts warn such changes would create a financial hole in the retirement funds of many people, and there would be daunting practical problems to changing the current regime.
It costs the Government an estimated £38billion a year in individual contributions to pension pots, while an estimated £15billion goes to employers in the form of National Insurance exemptions
Hammond also refrained from further cuts to the annual or lifetime allowances on pensions - the limits on what you can save towards retirement each year or during your life without penalty by the taxman.
Instead, the following was announced in the Budget today:
- The lifetime allowance for pension savings will increase in line with CPI inflation rate of 3 per cent as previously promised, rising from £1million at present to £1,030,000 in the 2018-19 tax.
- The state pension will also be increased by CPI of 3 per cent under the triple lock - the popular policy that means annual rises in the state pension are decided by whatever is the highest of price inflation, average earnings growth or 2.5 per cent.
- This means the basic state pension will rise by £3.65 a week to £125.95, while the full new state pension will go up by £4.80 a week to £164.35.
- The Government also announced new opportunities for pension funds to access long term investments, such as infrastructure.
It also wants to encourage them invest at the more adventurous end of the spectrum, saying this involves 'giving pension funds confidence that they can invest in assets supporting innovative firms as part of a diverse portfolio.
The Treasury adds: 'The Pensions Regulator will clarify guidance on investments with long-term investment horizons. With over £2 trillion in UK pension funds, small changes in investment have the potential to transform the supply of capital to innovative firms.'
Meanwhile, a Government review has suggested higher earners might be able to save more than the current annual or lifetime allowances if they put their money in 'patient capital' - jargon for young and adventurous businesses that might take years to reach their potential.
Steven Cameron, pensions director at Aegon, said: 'The lack of any mention of pension tax relief is very unusual for Budgets but very welcome. Implementing any change would have been hugely complex and required legislation in a parliament dominated by Brexit.
'Pension tax relief does reduce the Chancellor’s tax take in the short term, and there’s a case for redistributing this to those most in need.
'But this should be done only once there has been time for proper debate and not rushed through as a government cost-cutting measure.'
Former Pensions Minister and Royal London policy director Steve Webb said: 'If the Government is serious about unlocking more pension fund money to spend on infrastructure, this Budget announcement is likely to be a damp squib.
'The small print of the Budget says that all this amounts to is simply asking the Pensions Regulator to"clarify the guidance" given to pension funds about long-term investment.
'If we want to see serious money being invested by pension funds in infrastructure we need a supply of projects that pension funds can invest in, not minor tweaks to rules and guidelines.'
But Webb said that tax breaks for high earners who invest in 'patient capital' could have a big impact.
'Successive cuts in annual and lifetime limits for pension tax relief have left growing numbers of high earners facing caps on the amount they can save for their retirement. This is especially true for the highest earners, whose annual limit may be as low as £10,000.
'Higher limits for those investing in"patient capital" could be a revolutionary way of attracting serious money into this form of investment.
'But this would generally be suitable only for more sophisticated investors on the basis of good advice, and might be too risky an asset for those on more modest earnings to put a large proportion of their savings.'