CMEASY

The Devil was in the detail for Contractor Pensions in the emergency budget

Whilst many contractors and their advisers feared the Lib Dems' manifesto commitment to the complete abolition of higher rate tax relief on pension investment, it seemed as if investors had dodged a bullet as George Osborne sat down.

Sadly, despite his stated aim of hiding nothing in the small print of treasury notes, a seemingly throwaway comment from the despatch box may now end up having a massive impact on many freelancers.

Having stated in the house that the previous chancellor's cap on higher rate tax relief for investors earning more than £130k could prove unworkable, George Osborne hinted that he was going to consult employers and the pension industry to look at alternatives ways to plug the £3billion hole left in the deficit by not seeing through the restrictions.

Since the budget was announced last month, our pension advisers Contractor Financials have made an alarming discovery in the small print of a treasury document that accompanied the budget report, and worryingly, it looks like Osborne's solution may be to lower the annual limit for pension contributions for all investors regardless of earnings. A paragraph in the treasury's document reads "provisional analysis suggested that an annual allowance in the region of £30,000 to £40,000 might deliver the necessary yield".

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A dramatically lower future annual limit could spark a stampede of freelancers looking to use the current, almost unlimited, scope to invest. Many contractors currently use pension investment as a very effective way of minimising tax liabilities and so invest far greater amounts than a new cap would allow.

Reducing the annual limit from its current level of £255,000 to just £30,000 will be a body blow to those Freelancers who have made great use of the pensions simplification rule changes since 2006.

On a more positive note…
George Osborne has set about the task of abolishing the requirement to use pension funds to buy an annuity at the age of 75. This will not only give more investment freedom but also allow greater chances to pass pension funds down through the generations. This decision is still in consultation but until it is accepted, Osborne has temporarily increased the annuity age to 77 to help out those that may be nearing the age of 75.

Inflationary increases in the income from the state pension will now be tied to the greater of National Average Earnings, the Consumer Price Index or 2.5% so pensioners will be better off going forward but many contractors will have to wait until 66 to draw a pension as the authorities try and ease the burden on the state. This will be a blow to older contractors that have failed to invest personally into a pension whereas there is now even greater urgency for younger investors to start saving.

To discuss pension planning further with one of the advisers at Contractor Financials, please call Andrew Gains on 0845 062 8888 and inform him you are a client of CMEASY or email cmeasyclients@contractorfinancials.com