The usual pre-election noise about the imminent demise of higher rate tax relief has begun. The Liberal Democrats have pledged to cut pensions tax relief for higher earners if they win next May’s general election. The move would mean senior doctors could receive a much lower tax rebate on their pensions’ savings.
Pension tax relief currently benefits higher earners; anyone paying a 40 per cent marginal tax rate on their income saves more than a person paying basic rate tax of 20 per cent.
In its draft manifesto, the party stated it will introduce a single rate of pensions’ tax relief (which will be above 20 per cent) in order to redistribute money to the less affluent.
Steve Webb, the Lib Dem pensions minister, has called the current tax break “heavily skewed” and “unfair” – sentiments which have been echoed by Ed Balls and Ed Miliband. Even the Conservatives, normally shy of alienating high-earning professionals in an election year, are likely to tackle tax relief which is described as ‘low-hanging fruit’ by Treasury ministers.
While the Lib Dems have proposed similar cuts in previous manifestos, last year the idea seemed to be abandoned after proving difficult to introduce. Instead their sights turned towards reducing the lifetime allowance saying ‘while the Liberal Democrats still recognise the merits, in principle, of moving to a single rate of relief, there are significant practical obstacles to such a proposal… therefore, we support limiting lifetime relief as a more effective way of restricting the pension tax relief given to the wealthiest’.
The last few years have seen near-constant change to the pensions’ landscape meaning it is more difficult than ever for high-achieving professionals to plan for their retirement without expert help. Many savers may be keen to step up private pension contributions while the tax relief remains attractive but should be mindful of limitations imposed by both the annual and lifetime allowance rates.
Nick Clegg confirmed plans for a further reduction to the lifetime pension allowance from £1.25m to £1m and a ‘mansion tax’ on homes worth more than £2m. The draft manifesto is subject to amendment before the Lib Dem conference next month.
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