Market Impact
Our pension pots have been on quite a journey during the Coronavirus crisis. Fund values have been down and up and markets remain understandably sensitive to economic news. These are the kind of market conditions which can work well for people investing on a monthly basis. Some months you will invest after markets have dipped in value, purchasing a larger holding at a lower price. If the market then rises, you will have more units or shares that will benefit from the increase in value.
Is Pension Tax Relief at Risk?
Whilst amounts contributed and investment returns achieved have the greatest impact on the value of your pension fund, there is a third factor which plays a part if you pay your pension contributions yourself – the tax relief that HMRC adds to your payments. Will this tax benefit continue however, in a world turned upside down by recent events? Rishi Sunak’s predecessor, Sajid Javid, was said to be considering the removal of higher rate pension tax relief earlier this year. Indeed, it is often possible before a budget to get good odds on cuts to pension tax relief. Historically, we haven’t taken these rumours too seriously. However, these are unprecedented times, with worrying deficit levels only likely to increase further over coming months.
The press anticipates a “save the economy” budget on 6th July and the conundrum facing the Government is how to reduce the deficit without harming any recovery and alienating voters. Businesses need support, which means that increases in Corporation Tax and VAT are less likely. Reducing pension tax relief would generate an immediate cost saving and have a less direct impact on consumer spending. The priority will be getting people to work and spend, with long term savings and wealth creation of less urgency in a time of crisis. Furthermore, removing higher rate relief would be perceived as affecting only the “better off”.
Should I consider paying into my pension now?
We are not crystal ball gazers and there is no guarantee that tax relief will be changed. However, whether pension tax relief is reduced or not, we know for certain that it’s a very valuable benefit that’s available now. To illustrate, if a Scottish person earns £60,000 a year and pays £12,000 into their pension, they only pay £9,600. Basic rate tax relief of £2,400 is added directly to the pension plan and a further £3,120 can be claimed from HMRC. Without higher rate relief, that £3,120 would be lost.
During lockdown, we may have spent a lot less on expenses such as transport, leisure, and holidays. These savings may add up to hundreds or thousands of pounds and will be increased further if paid into a pension and augmented by tax relief.
If you want to bring forward your yearly pension payments, contribute a larger one-off lump sum, or increase regular payments to benefit from the tax relief available, we would always recommend you take advice first. Should you wish to enquire about seeking financial advice from Cornerstone Asset Management (the independent advisory firm of which snapshot is a trading name) then please get in touch via email help@snapshotpensions.co.uk
