Middle Class Savers Could Lose A Third Of Their Pension In Tax Changes

Pension experts warn plans may see workers lose out on thousands of pounds

19.01.2016

Kate Rawlings, Press Officer | 0114 274 4238

Pensions experts are warning some savers stand to lose up to a third of their pension pots if proposed changes to tax relief go ahead.

The Chancellor, George Osborne, is considering options to help cut the amount of tax relief the Government offers.

Pensions specialists at law firm Irwin Mitchell have warned the plans would hit middle income workers hardest, potentially leaving them tens of thousands of pounds out of pocket.

One option being considered would see a 40-year-old earning around £50,000 a year miss out on up to £175,000 by the age of 65 if the tax relief perk is completely scrapped.

Another option would see the same worker losing between £44,000 and £110,000 by the time they retire, according to pension provider Fidelity.

Currently, workers earning £42,385 or more – who are in the higher rate of income tax – receive a tax-free boost of £2 from the Government for every £3 they save into a pension. 

It means on average they get around 42 per cent more back than they invested when they retire, once income tax paid on withdrawing pensions is taken into account. 

Proposed changes could see tax relief cut dramatically or scrapped altogether. In the worst cases, savers could lose money.

It is expected the Chancellor will choose to make the system fairer by changing the tax relief rates of 20 per cent for basic rate taxpayers and 40 per cent for higher-rate tax payers to a flat level of either 33, 25 or 20 per cent. 

Currently higher rate taxpayers only have to invest £60 to get £100 in their pension pot. 

But if tax relief is dropped to 33 per cent, they will receive just £90 for the same investment. 

This falls to £80 if it is cut to 25 per cent, and £75 if slashed to 20 per cent.

A Treasury spokesman said: "We have not decided on whether or how to reform the system and are considering all options, including retaining the current system.”


Expert Opinion
A lot of people care about their bank balance because it is something that has an immediate impact on them but don’t seem to care as much about their pension pot.

Most people fail to recognise the impact pension reform may have on them because retirement can seem a long way off so it is an easy way for the government to pass through stealth taxes.

The reality is a far less comfortable standard of living for people who earn over £43,000 and it could make saving in a pension at all seem like a far less attractive option.
Martin Jenkins, Partner