UPDATE 20th February 2012: The question & answer below were written ahead of the Autumn Statement but are just as relevant ahead of the Budget 2012. For a full lowdown of the latest predictions of what will be in next month's Budget (March 2012) here is a link to the Latest Budget 2012 predictions.
Reader Question:
There have been rumours that the Chancellor could introduce tax on pension lump sums in his Autumn Statement. If he does will this take effect immediately or will it have to be introduced in the next Finance Act in 2012 and could it be retrospective in its application and effect ?
My response:
Ahead of every Budget (and now Autumn Statement) there are always rumours circulating that the Chancellor will pull high rate tax relief on pension contributions and/or introduce a tax on pension commencement lump sums. And obviously this has not yet happened.
In fact, these sort of changes have been avoided by the current Chancellor in favour of a system whereby the annual amount you are allowed to pay into pensions (and claim full tax relief) is effectively capped at a maximum of £50,000 a year.
While the Chancellor could well attack tax free cash lump sums and higher rate tax relief on pension contributions is it likely given the Government's plans to encourage auto-enrolment via employer pension schemes?
Of course it is possible. As to whether any changes can be made immediately or retrospectively, the answer is yes to both. The anti-forestalling changes to pension contributions back in 2009 (which effectively limited the annual limit for tax relieved pension contribution at the highest rate for people earning over £150,000) took immedaite affect.
Could the Chancellor back date any changes to pensions?
Yes he could although it would be extremely unpopular and a big vote-loser.
He could try and only apply any changes to new pension money instead but then this would be a logistical nightmare as pension benefits would have to be split into two parts in order to apply any tax charge.
Perhaps it would be simpler to just abolish tax free cash altogether if he were to tweak tax free cash lump sums but the uproar would be enormous and undermine the new auto-enrolment plans.
Plus some analysts claim that the amount of extra tax revenue gained from doing this is unlikely to warrant such changes.
So to sum up:
- The Chancellor might attack tax free cash but then again he might not
- If he does make changes then he can apply them as he pleases