Announcement on pension tax relief: what it means for you

David Gauke pensions tax relief

The government has made a major announced, on pensions tax relief. In one of his first moves as the new Work and Pensions Secretary, David Gauke has ruled out fundamental changes to pensions tax relief. He admitted that a fragile government working in a loose alliance, this kind of radical change didn't stand a chance. So should we be celebrating? Is this great news for pension savers? Or is it a bit of a blow?

SEE ALSO: Millions 'lurching like zombies' towards retirement

See also: Queen's Speech: what it means for your money

What changes are being ruled out?

Pensions tax relief has been in the frame ever since George Osborne floated the idea of radical reform as Chancellor. He launched a consultation back in 2015, and it reported in full last year.

There were a number of potential options discussed in the consultation. The most radical was a switch from the pension system (where you get tax relief up-front and then pay tax on pension income) to an ISA system (where you pay tax up front and get the proceeds tax-free). This would cut the cost to the Treasury, but would be a far less generous approach, and there was widespread concern that it would put people off saving for retirement.

The consultation also looked at the possibility of switching from the current arrangement, where you get the tax back at the highest rate you pay (40% for higher-rate taxpayers and 20% for basic rate taxpayers), to a single flat rate of relief. This would ensure that the benefits of tax relief on pensions would be spread far more evenly, and received more support from the industry, but would have been a difficult sell to higher earners.

Other potential changes floated in recent months have focused more on making the system less generous in order to cut cost. They have included the spectre of lowering the annual allowance of what can be saved into a pension, and reducing the lifetime allowance.

Is the announcement good news?

The fact that the government has ruled out a move to a less generous system - at least during the life of this parliament - is good news. Kate Smith, head of pensions at Aegon says: "We welcome David Gauke's comments regarding a period of stability for pensions tax relief. We hope this also means an end to the constant tinkering with the pension tax rules we've seen over the last 10 years. Hopefully this puts an end to speculation about imminent reform which has been unsettling for those saving into a pension."

She adds: "There are a number of issues that deserve more immediate attention such as legislation to tackle pension scams and a the development of a cross party consensus on how to tackle the rising cost of social care."

However, we cannot overlook the possibility that when it eventually comes, a reform of tax relief could actually be structured to benefit ordinary pension savers - and ruling that out is a bit of a disappointment.

Back in 2015, then pensions minister Steve Webb floated the idea of a move to a flat rate of relief of 33% - which would mean that higher earners get less tax relief, but basic rate taxpayers get more. And while there were concerns that such a big change would create havoc for pension schemes and the industry as a whole, there were commentators who felt a simple, easy-to-understand and more generous system could help encourage people to save more.

Of course, this was never a Conservative Party policy, as Webb was a Liberal Democrat, so arguably it was never going to happen. However, it shone a light on the fact that not all changes to pension rules have to leave us worse off. There's an argument, therefore, that while we can be relieved that Gauke has ruled out changes to make pensions less attractive and more complicated - there's also the downside that he's also ruled out the chance to make them simpler and more generous too.

How we spend our pensions
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How we spend our pensions

Figures from Saga show that the over 50s now account for the majority of money spent by Brits on travel and tourism. They have the time to spare, the money, and they are healthy enough to take on the world.

A poll from Abta found that in the wake of pension freedoms, 35% of people were considering cashing in at least part of their pension to travel. A separate study by Senior Railcard found that pensioners take an average of three holidays a year, plus two weekends away, and 17 day trips.

Research from Senior Railcard found that retirees eat out an average of three times a month. However, one in ten do so more than twice a week, and one in three people said that one of the first things they did when they retired was to go out for lunch with their friends.

Of course, just because retirees want to enjoy themselves, it doesn't mean they are happy to throw money away. The vast majority are keen to eat at lunchtimes, when a fixed lunch menu tends to be cheaper, and canny retirees are skilled at tracking down pensioner special offers too.

Figures from the Office for National Statistics show that on average nearly a fifth of the money spent by people aged 65-74 is on leisure. This includes everything from the cinema and theatre to golfing and gardening. They spent more on this than on food, energy bills and transport.

A report by Canada Life found that retirees are spending £4,279 a year on having fun - that’s more than £1,000 more than they spend on boring essentials, and is a 74% increase over the past ten years. It went on to predict that this trend was set to continue, and that pension freedoms would encourage people to spoil themselves a bit more in retirement

Pensioner property wealth is now over £850 billion, and all these family homes don’t look after themselves. The Senior Railcard survey put home renovations in the top 20 activities people got stuck into on retirement, and figures from ABTA found that almost a third of people who were considering raiding their pension pots under the new pension freedoms planned to spend the cash on their home. This seems like an eminently sensible investment - looking after what is undoubtedly their most valuable asset.

Unsurprisingly, while some pensioners are very well off indeed, others are struggling with debt. Figures from Key Retirement found that the average retiree has £34,000 of debt.

Most of this is mortgage borrowing - in many cases driven up by the number of people who unwittingly signed up to an interest-only mortgage. However, credit cards, overdrafts, and loans are also common. It’s why so many pensioners have used pension freedoms to access enough cash to pay their debts.

The day to day basics are swallowing up their fair share of pensioner cash too. On average, people aged 65-74 spend a third of their weekly income on essentials like food and bills - which is hardly living the high life.
The bank of gran and grandad has become an increasingly vital source of cash for families. According to Key Retirement, of those who release equity from their property, 21% of them use the cash to treat their children and grandchildren. This includes an average of £33,350 to help children get onto the property ladder, £6,000 to buy them a new car, £11,000 on family weddings, and £24,780 giving grandchildren a helping hand.

While retirees are quite rightly spending what they need to enjoy retirement, they are hardly all throwing caution to the wind, buying flash cars and spending the kids' inheritance.

Most expect to have something left over to pass onto their family after their death. Some 69% expect to leave property in their wills, and 75% expect to leave cash - according to - because while baby boomers know how to have fun - they also know how to save for the future.


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