Hargreaves predicts massive cut in pension tax breaks

The Treasury is due to reveal its decision on reforming pension tax relief later in the week following a lengthy industry consultation.

Hargreaves predicts the annual allowance will be reduced from £255,000 to £40,000, rather than the possible £30,000 suggested in the consultation.

The firm also anticipates a reduction in the lifetime allowance from £1.8m to £1.5m.

There may also be changes to the rule that the annual allowance does not apply to employer contributions in the final year of work.

Head of pensions research at Hargreaves Lansdown Tom McPhail says Treasury officials are keen to scrap this rule. This allows the self-employed or senior executives to inject cash into their pensions just before they retire without incurring a tax penalty, provided they do not then exceed the annual allowance.

This practice is seen by Treasury officials as "an abuse of the system", according to McPhail.

"It is vital the government maintains incentives for individuals to defer spending and to save for their retirement," McPhail adds.

"Without suitable tax breaks on pensions, individuals will make decisions now which may appear rational in the short term but which would detrimental both to themselves and to the stability of the economy in the longer term.

"Everyone will lose if tax relief rates are curbed because the pension system will become more complicated and as a consequence, more expensive to run."

Hargreaves Lansdown recommends the government maintains tax relief at investor's marginal rates and instead cut the annual allowance further in order to meet financial targets.

 

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• Topics
• Hargreaves Lansdown
• Treasury
• coalition government
• Tax relief
• pension reform