High earners will seek alternative savings away pensions whatever the result of Election 2015, according to financial experts.
Both the Conservatives and Labour have hinted in their manifestos that tax relief on pension contributions for those earning more than £150,000 a year will change.
As a result, these wealthy individuals will look elsewhere for reasonable returns on their savings and investments, says Liam Mayne, principal consultant at financial firm Aon Hewitt.
These pledges follow changes in Budget 2015 that lowered the lifetime allowance to £1 million down from £1.25 million.
Mayne also explained that these changes not only affect the highest earners, but many more on middle incomes who could reasonably expect their pension to grow to more than £1 million during their working lives.
Alternative investments
Another financial consultant, Sue Waites at consultants Hyman Robertson reckons high earners will opt for more cash as part of the remuneration as the tax paid on a higher salary is not much different from paying tax penalties on breaching the lifetime allowance.
“Pensions look unattractive because of tax on earnings and then tax on pension benefits in the future when other investments tend to have tax on money going in but not on any coming out,” she said.
Both Mayne and Waite agree that successive governments have tweaked pension rules too much and retirement savers are losing confidence in making long-term financial plans because the outcome is so unpredictable.
The problem for many is regular saving with added compound interest that varies from year to year makes forecasting if and when the £1 million lifetime cap is reached too hard.
And as the pension decision makers at most employers are the highest earners, this could change the way firms look at retirement saving and remuneration.
Increase ISA limits
The experts believe that more financial help should be offered to high earners and that future governments and financial providers should look at new products to serve the market and encourage saving.
“One way to do this would be to increase the tax-free limits on ISAs,” they said.
Both explained that ISA limits are rising in line with inflation, but now the country was looking at a period of little or no inflation; the government has to decide whether to keep raising the limits or keep them where they are.
If they remain the same, this could trigger high earners seeking other investment packages.
Expats have the opportunity of considering a switch to a Qualifying Recognised Overseas Pension Scheme (QROPS), which allows investment above the lifetime allowance without penalty, but is only open to non-residents.
