Britain’s highest earners have seen tax relief on pension contributions clipped in Chancellor George Osborne’s Summer Budget.
He confirmed rumours circulating earlier in the week that those earning more than £150,000 a year will pension contribution relief on payments into their retirement savings of £40,000.
Instead, their allowance will taper from £40,000 to £10,000.
For every £1 earned over £150,000, the annual allowance will reduce by 50p. Anyone earning more than £210,000 will have the reduced annual contribution allowance of £10,000.
The measure will fund the inheritance tax (IHT) family home allowance.
Pensions to work like ISAs
George Osborne is also seeking radical reform of the pensions system and has announced a consultation to encourage those outside government to put forward their views.
Other pension measures announced in the Summer Budget by Osborne include:
- Delaying plans for a market for trading annuities until 2017. More details will come with the Chancellor’s Autumn Statement 2015.
- The Lifetime Allowance for pension contributions will drop from £1.25 million to £1 million from April 6, 2016 and will increase each year in line with consumer price index from April 6, 2018.
Is also keen to make pensions work more like ISAs, where no tax relief is given on investment, but funds grow tax free and no tax is due when the cash is taken out.
Chancellor open to change
If the idea is supported in the public consultation, retirement savers could still see some tax incentive to save, says Osborne.
His ambition is to change the savings habits of younger generations but making pensions more attractive and accessible.
“While we have taken important steps with our new single tier pension and generous new Isa, I’m open to further radical change. Pensions could be treated like ISAs – you pay in from taxed income and it’s tax-free when you take it out, and in between it receives a top-up from the government.
“This idea and others like it need careful and public consideration before we take any steps so I am today publishing a green paper that asks questions, invites views and takes care not to pre-judge the answer,” he told MPs in his Summer Budget speech.