Beat the pre-Budget report pension threat

Higher-rate taxpayers who fear a possible new clampdown on pension tax relief should consider making pension contributions before Wednesday’s pre-Budget report (PBR), say financial advisers.

Hargreaves Lansdown, the adviser and self-invested personal pension (Sipp) provider, has contacted clients to suggest bringing forward pension contributions in case the chancellor Alistair Darling announces an immediate reduction in higher-rate tax relief.

Laith Khalaf, pensions analyst at Hargreaves Lansdown, says: “If you are thinking about making a pension contribution to claim back some higher-rate tax you will pay this year, and don’t want to take any chances, consider doing so before December 9.”

He believes individuals earning more than £100,000 look like a “soft target” for limiting upfront tax relief on pensions.

“Restrictions on tax relief are already in place for those with income over £150,000 so the government would simply need to pass legislation substituting the lower figure. There is also the chance that the government decides on a more radical policy and abolishes higher rate tax relief altogether,” he warns.

Khalaf also says it could be worth setting up or increasing a regular savings plan for a pension before Wednesday, as regular contributions could fall outside any new restrictions.

For investors with existing Sipps or personal pensions, it should be straightforward to make contributions before Wednesday by paying by debit card – provided the facility is available. Card payment makes more sense than using a cheque, to avoid delays in the receipt of funds.

Khalaf says it should also be feasible for investors to open and fund new pension plans, particularly with investment companies, before Wednesday.

Investors should be able to make these tax-favoured contributions at no overall cost and without adding to their stock market exposure through what is called a “bed-and-Sipp” or “bed-and-pension” transaction. In effect, this involves transferring existing investments into a pension.

Advisers say it is almost certainly too late to complete an “in specie” transfer, of shares, rather than cash, into a pension between now and the PBR, and most plans do not offer such switches.

However, there is still time to contribute cash to a pension ahead of Wednesday, which could then be used to buy back a holding that you sell from elsewhere in your portfolio.

To perform this bed-and-Sipp transaction, investors need to have the ready cash to fund their pension initially – which they get back on the sale of their investment – and the contribution is boosted by pension tax relief.

By selling a portfolio holding ahead of the PBR that is liable to capital gains tax (CGT), investors may also be able to sidestep any increase from the current CGT rate of 18 per cent. Future returns are then sheltered from tax through the pension.

Andrew Gadd, head of research at Lighthouse Group, the advisers, says the potential for these “double tax savings” from a bed-and-Sipp ahead of the PBR could prove worthwhile.

Many advisers recommend bed-and-Sipp and similar bed-and-pension transactions as “good housekeeping”, regardless of specific PBR threats. “Whatever you think will happen to higher-rate tax relief, taxes are almost certainly on the way up, so it’s worth sheltering investments where you can,” says Khalaf.

However, a bed-and-Sipp arrangement does mean that investors will tie up their investments in a pension, rendering their money inaccessible until at least age 50 (or 55 from April).