CHANGES could be made to the way your pension is taxed as the government looks at how it can cover the costs of the coronavirus pandemic.
The government is reportedly looking at a pension tax shake up, but any change would take time to bring in and wouldn't happen right away.
There are three changes reportedly being considered to workplace and personal pensions.
That includes a rethink of a tax break that boosts your money when saving into your pension through work.
Currently the amount of tax-relief you get depends on your tax rate – either 20% or 40% – but this could change to a flat rate of 30% for all savers, according to the reports.
Tax could also be introduced on the amount employers put into workers pensions.
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%.
- Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £179.60 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify.
- Basic state pension – If you reached the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £137.65 per week and you'll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.
What changes could be made to pension taxes?
One of the changes being considered is a flat rate of pensions tax-relief.
All pension savers get tax relief on their contributions.
When you put money into either a workplace or personal pension, the government takes what you would have paid in income tax and puts it in your pension instead.
Basic rate taxpayers get a 20% boost and higher earners, those earning more than £50,000, get 40%.
Additional rate taxpayers, who earn more than £150,000, can get 45% relief.
There are rumours each year that this relief will be scaled back so savers only get the basic rate.
This would leave higher rate taxpayers with less, but not affect those who pay the basic rate of tax.
The rumoured change now could see that rate change to a flat 30% for all savers.
This change would leave higher earners worse off, but for those paying tax at the basic rate it would be better.
The government is also considering a a tax on employer contributions to pensions, reports suggest.
Becky O’Connor, head of pensions and savings at pension platform interactive investor said that such a change could leave people worse off in retirement.
What is pensions auto-enrolment?
HERE’s what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work's pension scheme if you meet the following criteria:
- You aren't already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,136 up to a limit of £50,000 (in the tax year 2019/20). This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
She said: “We need more not fewer incentives to invest for retirement."
“Tax relief and employer contributions are two benefits that make pensions the best way for most of us to put money aside for the future.
"If the Government chops away at them, workers face poorer outcomes in retirement. This could translate into more pressure on public services from a less financially secure older population in years to come."
She added that the government should think hard before making changes because people are now much more aware of their pensions thanks to the introduction of auto-enrolment.
Ms O’Connor said: “While pension tax changes might be seen as a clever policy move that wouldn’t attract too much negative attention in former times; now, with workers paying more attention to their retirement pots, any tinkering could be more unpopular than expected."
The government is also said to be looking at the pension lifetime allowance.
This is a limit on how much you can save into your pension in total that's currently set at £1,073,100, and is frozen at that until 2026.
Why is the government looking at pension tax and when could it change?
The money raised from any changes to pension taxes could raise more money for the Treasury.
The government has forked out billions to support the country through coronavirus and it now needs to find ways to cover these unexpected spending costs.
No changes to pension tax have been announced yet and proposals would likely be made in the Chancellor's Budget speech.
Rishi Sunak is expected to have his next Budget in autumn, but this could be earlier because of coronavirus.
The Budget is usually an annual event but Mr Sunak has made an unprecedented number of announcements in the past year because of the pandemic.
Any change to pension tax announced in a Budget would not happen straightaway, as new rules have to be passed into law.
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Even before any budget announcement, Mr Sunak would also have to get colleagues on board with any pension changes, getting the greenlight from the Prime Minister and the Conservative party.
That might be tough as experts have previously called pension tax changes "politically toxic".
Steven Cameron, pensions director at Aegon, said: “Once again the prospect of reforming pension tax relief for higher earners is being floated as a means to restore holes in the government’s finances.
"What’s different this time is that the state pension triple lock is also firmly in the spotlight with recent earnings anomalies likely to grant current state pensioners a bumper increase next April.
"Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness."
The State Pension amount rises each year in line with what's known as the triple lock.
That means it goes up to whichever is highest: inflation, wages or 2.5%.
Pensioners could get a record state pension rise because of coronavirus as wages are rising at a rate that could be as high as 8%.
This is also something the government is likely to have to look at, though is separate to potential pension tax changes.
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