Those of us who routinely think about what we have planned for retirement have received what seems like umpteen pieces of depressing news, that might affect our finances later on in life. The latest one concerns pension allowances, which have been slashed by 20% from 2014 following a controversial announcement by Chancellor George Osborne.
The maximum amount that a single person can put into their pension annually has been capped at £40,000, down from the previous limit of £50,000. This is the amount where money placed into a private pension is eligible for tax relief. This move was made in order to try and boost tax revenues by targeting rich pensioners, but it seems middle-class people could be affected too.
Middle squeezed again?
Middle-class savers are likely to be hit just as hard as those on high incomes, especially if, in the final year before retirement, they choose to deposit more than usual by transferring funds from a savings account to ensure they have enough money to live on. Fears over a divide in wealth between those on final-salary pensions and those on ordinary ones could also be realised.
If you’re anxious about these latest cuts, how might they affect your money? Here are the things to look out for:
- More people on ordinary incomes are likely to have to pay tax on money deposited into their pension funds
- Anyone in a middle-income job earning in the region of just over £50,000 a year might find that, if they receive a substantial pay rise upwards of 10%, they might go over the limit and end up paying more than they bargained for by way of tax
- The higher someone’s annual salary is, the sooner they will face a tax charge
- To try and beat the system to some degree, some spare capacity can be carried over from the three previous tax years, but it’s important to check if there was any for each year before using it.
- Those on final salary schemes are most likely to be affected by any changes.
Further cuts ahead?
The current level of tax relief for private pension holders might yet fall further, especially with austerity biting. To try and tackle the budget deficit, wealthy pensioners are likely to face even more pain in the near future, with the annual allowance possibly being brought down to as little as £25,000 by the time of the next general election.