Pensions: Sign of the times - government favours spenders not savers

Proposals in the last pre-Budget report, including a reduction in the maximum size of pension pot allowed and a rise in national insurance, have implications for personal, scheme and state pensions, writes Andrew Tully of Standard Life.

Kenny and Alison Phillips were in a meeting with their financial adviser, Michael Neilson when the discussion turned to the latest pre-Budget report. ‘So, apart from making me change VAT and trying to persuade us all to spend more, did the pre-Budget report make any changes that will have an impact on our pensions or other savings?’ asked Kenny.

‘As you say, most of the immediate measures are designed to encourage people to spend rather than save,’ replied Michael. ‘But there are a number of changes that may have an impact on your personal position.’

Michael had known Kenny for a number of years and helped out with personal advice and with setting up a pension scheme for Kenny’s small manufacturing business. After a period of not working when their children were young, Alison had recently starting working in the business as well, initially for a few hours each week.

Contribution restriction

‘I heard the amount you can put into a pension is being restricted,’ said Kenny. ‘Is that right?’

‘Yes there has been a change,’ responded Michael. ‘The lifetime allowance is going to be capped at £1.8 million until at least April 2016. This is the maximum value of pension benefits you can take in a tax-efficient way. Any excess above this is taxed at 55%, assuming it’s taken as a lump sum.

‘This is unlikely to affect you, but it’s something we will keep an eye on as you get older. If investment performance is good, then nearer retirement we can always switch some of the ongoing contributions into Alison’s pension instead, especially if she starts working longer hours for the business, as you’ve mentioned.

‘What may be more of an issue is the restriction in tax-relieved contributions in any one year, which is also being frozen. But it will still be £255,000 from 2010 onwards, so there is considerable scope,’ said Michael.

‘Why are they not increasing these limits?’ asked Kenny. ‘I thought the government was trying to encourage more people to save for their retirement.’

Tax relief under control

‘These are the main tools at the government’s disposal to control pension tax relief,’ Michael replied. ‘As you mentioned earlier, at the moment the government is more interested in spending rather than encouraging people to save for the long term.