With less than one month left of this tax year time is running out for ISA and pension investors – or anyone looking to boost their savings and reduce their HMRC bill. Read our Guide to ISAs, Pensions and Tax-efficient investing to make sure you don’t get left behind.
More than £20.3 billion was contributed into personal pensions last tax year, not far off the peak of £20.9 billion contributed in 2007/08 ahead of the financial crisis and downturn in the UK economy, according to HMRC.
The most recent figures are no doubt bolstered by auto-enrolment, which was introduced in October 2012 and has so far enrolled nearly six million workers from 87,500 companies into workplace pension schemes, taking the total number of workers saving for retirement to 21.3 million.
While it is great news that so people are saving for retirement, and it is clear certain pension policies have been successful in boosting saving, with the other hand the government has been quietly taking away. Income tax relief is available on individual and employer contributions to registered pension schemes up to an annual allowance. In the record pension saving year of 2007/08 individuals were allowed to save £225,000 a year into a pension, their annual allowance – and £1.6 million over their lifetime, their lifetime allowance. Any pension savings in excess of an allowance are subject to a tax charge.
These allowances rose the following year, and the year after that – peaking in the 2010/11 tax year at an annual allowance of £255,000 and a lifetime allowance of £1.6 million. Then, in April 2011 the annual allowance was slashed to just £50,000 – and it has fallen again since. Currently pension savers can invest £40,000 a year in a pension scheme and £1.25 million over their lifetime – and the lifetime is set to fall to £1 million in April.
More Cuts to Come?
“The annual allowance is currently £40,000, having been cut from £50,000 and down from £255,000 in 2011,” explains Tom McPhail of Hargreaves Lansdown. “For many people, a sum of £40,000 a year looks more like an annual salary than a pension contribution, however for higher earners, those who have left their pension funding until late in their careers and for older members of final salary pension schemes, this is already an uncomfortably low ceiling. That might not stop the Chancellor from bringing it lower though.”
Higher earners need to top up now as after April 6th their annual allowance will be tapered, with those earning more than £210,000 allowed to invest just £10,000 in a pension a year.
McPhail added that many in the pensions industry have called for the lifetime allowance to be scrapped altogether, but said the Treasury has found this a useful mechanism for progressively restricting the overall amount investors can build up in their pensions and could cut further from the planned reduction to £1 million this April.
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