Nervous about Budget pension cuts? Six ways to shelter your money
As Philip Hammond looks to balance the books, he hinted there would be cuts to the ‘eye-wateringly expensive pension tax breaks’. Many were quick to predict that pensions, particularly allowances and tax-incentives would be curbed during this month’s Budget announcement.
Some suggested that cutting the pension annual allowance – the total amount you can pay into a pension pot every year tax-free – would be an easy target.
After all, since it was introduced in 2006, the annual allowance has dwindled from £215,000 to just £40,000 now.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said it may get lower still in the future.
“If it’s threatening your headroom, you need to get to grips with your retirement savings alternatives. Fortunately there are six solutions – including tax-efficient savings and investments, handy allowances, and planning strategies.
“The trouble is that some of these are under threat in the Budget too. The dividend allowance is a really easy target for Hammond. It was introduced at £5,000 in April 2016, cut to £2,000 in 2018, and there’s nothing stopping him cutting it further or axing it altogether to make ends meet. It means it’s worth investing what you can as tax-efficiently as you can, while you can.”
Alternatives if you’re near the pension annual allowance
Coles lists the following six alternatives to shield your money from tax:
- Use your Lifetime ISA allowance
If you’re aged between 18 and 39, you can save or invest up to £4,000 a year into the LISA, and the government will add a 25% bonus. You can use the LISA to pay for a first home, or save for retirement. The way the bonus works means that for most employed people, saving for retirement through a pension is a better bet – especially if your employer is offering contributions. However, if you are about to breach the allowance, a LISA is one alternative.
- Make full use of your ISA allowance
In the current tax year you can put up to £20,000 into an ISA, where growth and payments will be free of tax.
- Make use of your tax allowances
If you want to invest more than the ISA allowance, it’s worth thinking carefully about how you manage this. Currently the dividend allowance is £2,000 a year, so you can move dividend-generating investments into your ISA in order to stay below this threshold. You also have a capital gains tax allowance (£11,700).
- Use your spouse’s allowances
If they’re working, they have a pensions annual allowance of up to £40,000, so you can top up their contributions. Even if they aren’t earning they have an annual limit of £3,600. You can make contributions into your spouse’s pension, ISA and LISA. You can also make full use of their capital gains tax allowance and dividend allowance by investing in a fund and shares account.
- Consider VCTs and EISs
Venture Capital Trusts and Enterprise Investment Schemes have specific tax benefits: if you buy newly issued shares in them, and hold them for a minimum number of years, you get capital gains tax relief and tax relief to set against any income tax liability. However, these are very risky investments, so are only suitable for the minority of investors who are prepared to take this level of risk with their retirement savings.
- Talk to your employer
In some cases your employer will be prepared to redirect contributions into a workplace ISA once you have reached your pensions annual limit.
This may be especially fruitful once you earn over £150,000, and the annual allowance taper kicks in. The tax rules mean you can’t use salary sacrifice to bring your income down. However, you can ask your employer if they are prepared to pay you in cash or contribute to a workplace ISA instead once you have filled your reduced pensions allowance.