On November 22 the Chancellor will deliver the 2017 Autumn Budget. This will not be a Pre-Budget Report or an Autumn Statement, but the full Budget introducing changes for forthcoming tax years.
Whether or not a Budget will contain changes affecting pensions is the subject of frequent speculation, but there can be no guarantees. However, on a number of occasions in recent tax years those that predicted a reduction in the annual allowance (or some kind of additional restriction, such as the money purchase annual allowance or tapered annual allowance) were proved correct.
The Work & Pensions Secretary recently stated that major reform of pension tax relief is on the table but ruled out fundamental change in the short term. So, we are not anticipating a major overhaul of the current system, but that does not exclude small-scale changes to existing limits. The simplest way in which the amount of tax relief available to individuals can be restricted is by reducing the annual allowance, as has been done on a number of occasions in recent years.
Will this happen again on the 22nd of November? Who can say, but the constant tinkering with pension limits does create an incentive - at least to those with adequate financial means - to pay the maximum contribution current limits allow before Budget day.
The maximum contribution is the remaining annual allowance for 2017/2018 plus available carry forward (unless the money purchase annual allowance applies). Total personal contributions for the tax year are also capped at 100% of relevant UK earnings, which means some pension scheme members will not be able to fully utilise their annual allowance and carry forward. Employer contributions are not similarly restricted, providing another route to maximising pension funding.
Many of those that can afford to pay the maximum contribution in advance of the Budget will just be bringing their planned contributions forward, so ‘no change’ on Budget day would have no negative consequences for them. But it does have the minor benefit of extra tax-free fund growth on those contributions that were paid into the pension fund earlier than would otherwise have been the case.
If on Budget day, the annual allowance is restricted with immediate effect, those that had paid the maximum contribution may be in a better position. Whilst past changes are no guide to future ones, those that had fully utilised the annual allowance before the Summer Budget of 2015, for example, benefited from an extra £40,000 worth of annual allowance compared to those than had not used any part of the annual allowance by that date.
We will have to wait and see what the 22 November 2017 brings for pension savers, but paying the maximum contribution before the Budget can potentially put clients in a more advantageous position with no downside to note for those with sufficient means to maximise their contributions now.
2 November 2017