Is the end nigh for pension tax relief?

Now the Scottish referendum is over, you might be looking for something new to worry about. We've suggested worrying about the tax relief on your pension in the past.

Given how much the relief costs, it has long seemed unlikely that top- and higher-rate taxpayers will keep getting relief at their marginal rate. But the day of reckoning looks to be getting closer.

The Lib Dems have just published their "pre-manifesto", says Ian King in The Times. And buried in it is a pledge to establish a review that would consider a "single rate of tax relief" that would "be set more generously than the current 20% relief".

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This is a clear reference to pension minister Steve Webb's suggestion a few months ago that the rate of relief should be set at a flat rate of 30% for everyone.

I am mildly bemused by some of the arguments here. If you are only paying 20% in tax, but you get back 30%, you aren't so much getting tax relief as a taxpayer-funded subsidy.

And if you are a higher-rate taxpayer, you won't get full tax relief anymore, even though you'll still be fully taxed on the capital and income when you retire. As a result, you might well wonder why you should bother saving into a pension at all.

Still, as King points out, behind the pledge there are some "hard headed and pragmatic politics": private pension relief costs £54bn a year, and of that some 55% goes to 40% taxpayers and 20% to 45% taxpayers.

The new system would create four winners for every loser and save the state some money too. Webb calls the latter saving "shaving a bit off towards deficit reduction".

This is the kind of thing Labour is likely to sign up to as well: the party has already talked about abolishing the top rate of relief so that 45% taxpayers only get 40% back, for example. "Change is definitely coming, whoever wins the election," says King.

That said, it isn't a given that the 30% flat rate will end up as policy it is hard to see how it would apply to employer contributions, and it won't be an easy sell to the public sector either.

As Financial News put it, "how would HMRC put a financial value on the employer-financed pensions entitlements being built up by millions of public-sector employees, in order to adjust the tax due from them"?

Still, even if a new 30% relief rate doesn't make it through, something has to change to get the £54bn annual cost down. So there might be another cut in the annual allowance or possibly yet another complicated cut in the lifetime allowance currently set at £1.25m.

The upshot? Unless you are likely to be near the lifetime allowance on retirement already, now looks like a good time to save as much as possible into your pension pot.