Every year we hear pre-Budget rumours there could be fundamental changes to the tax incentives for pension saving, perhaps unsurprisingly given that the net cost to the Exchequer is around £40bn*.

But this year the cost of pension tax relief will come under even greater scrutiny given the extraordinary Government spending needed to support the economy throughout the COVID 19 pandemic. And of course this debt will have to be repaid sometime.

That said, any Government will still want to incentivise saving for retirement, and the Office for Tax Simplification (OTS) issued a consultation last week which amongst other things sought views on how higher rate relief could be given automatically on pension savings.

The truth is, nobody knows if changes will be made, or when, if at all.

Why pension funding matters

For many clients, a pension remains the best way to save for retirement. The combination of income tax relief on the way in, and tax free cash on the way out means that, pound for pound, they will in most cases provide a higher net income than most other investments, including an ISA.

Looking beyond retirement incomes, they also make family wealth transfer easier. Savings are protected from IHT, and the option of drawdown for beneficiaries not only extends IHT protection, but also means that investment income and gains remain tax free.

For those with the means, it is not surprising then that clients will wish to maximise savings into pensions, and the tax year end often focuses minds more keenly.

How much can be paid in?

Understanding how much a client can pay into their pension in the most tax efficient way is therefore crucial.

Our new practical guide 'How to maximise pensions savings', and case study 'Maximising pension contributions' shows you how.

Pension v ISA

There is no tax on income and gains made on investments in a pension or an ISA. They are the same in this respect. Pension funds are, however, protected from IHT, while ISAs are not.

For retirement savings, pensions have an edge over ISAs because of the tax reliefs given on contributions made and the fact that on withdrawal, a quarter of the fund can be taken tax free, with the rest taxed at the client's marginal rate of income tax in retirement, which may be lower than the rate they paid during their working lives.

Other benefits of pension savings

Saving into a pension not only provides the obvious benefits in retirement and beyond, but they can also play an important part in minimising the amount of tax your clients pay on income and gains now.

When a client makes a contribution into their pension, the tax paid on income and gains may reduce because:

• both earned income and savings income, including dividends and bond gains, may be taxed a lower rate
• capital gains made on investments may be taxed at 10% and not 20%
• personal allowances could be re-instated
• child benefit tax charge may reduce

For high earners facing a tapered annual allowance, an individual pension contribution could restore the full allowance by taking 'threshold income' below £200,000.

Summary

Whatever lies ahead, there is a strong argument for making the most of the allowances and tax reliefs available today. Our new practical guide 'How to maximise pensions savings', and case study 'Maximising pension contributions' shows you how.

* HMRC – Estimated cost of tax reliefs