5 pension points to look out for in the Budget

The Budget takes place this Wednesday, March 16 and although the Chancellor has had second thoughts on making radical changes to pension tax incentives, he may make tweaks to the current system.

Current system

Pension savers receive a government top-up or tax relief on their contributions at the rate they pay income tax, whether that be 20, 40 or 45 per cent and investment growth is tax-free. The total amount, where you get tax relief is capped. This is known as the Annual Allowance, which is currently £40,000 a year for most people. If you exceed this, you will have to pay a tax charge.

The Chancellor may make tweaks to pension tax incentives

Pensions in payment are taxed as income, but you can take up to 25 per cent of your pension fund as a tax-free lump sum any time after you reach age 55. 

The amount of pension benefits you can build up over your lifetime, without triggering an extra tax charge is also limited. The current standard lifetime allowance is £1.25 million, but this is due to fall to £1million on April 6, 2016.  

Things to look out for in the Budget

  1. A reduction in the Annual Allowance. A reduced Annual Allowance would increase the attraction of starting to save regularly from a younger age.
  2. A further reduction in the lifetime allowance. Over time this would affect many middle earners who would need to think about whether to stop saving into a pension or risk a tax charge. 
  3. A reduction in the tax-free lump sum, or capping the total monetary amount, to say £100,000 – hopefully only from funds built up from new contributions.
  4. Allowing individuals to take their State pension before their State pension age, but at a reduced level calculated on a financially neutral basis.  
  5. An increase in the income-tax thresholds. This will be good news as it increases take-home pay, but it will hit the government tax top-up on pension contributions for those moving into a lower-tax, band reducing the overall amounts paid into pensions. 

"Changes could be made as early as Budget Day or on April 6 2016, the first day of the new tax year," says Kate Smith, head of pensions at Aegon.

"If you're a higher-rate taxpayer, you may wish to consider bringing forward the timing of any extra pension contributions you are considering by taking advantage of any remaining annual allowance you have from the past three years before by April 5 2016. You may not have the same choices after this date," Kate adds.

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