Is a bigger home the better pension?


Savers planning their retirement could be better off investing in a bigger home instead of paying into a pension in case George Osborne’s tax raid on the middle class goes ahead, a recent report has warned.

The changes that have been proposed to tax relief on pensions will leave higher-rate taxpayers worse off than if they had invested their money elsewhere, a research by the Institute for Fiscal Studies revealed.

Its warning stated that the move could actively discourage people from saving. Criticism for the IFS regarded changes to the tax system which have already created “instability”. They furthermore forecasted any additional “radical reform” could create more problems.

Current rules state that savers receive pension tax relief at the highest rate of tax they pay, that either being 20, 40 or 45%. The government is however considering the introduction of a flat rate of tax relief for everyone.

The IFS explained this change would discourage higher-rate taxpayers (anyone with a salary of £43,000 and more) from saving for retirement, whilst at the same time giving basic rate taxpayers would have a bigger incentive to save.

The report stated furthermore that in case the flat rate was anywhere below 30%, those who had already paid more tax in their working lives would miss out in their retirement.

The report said: “As far as tax is concerned, they would be better off saving for their retirement via an ISA or a more expensive home.”

The IFS suggested upgrading your own home rather than investing in a second property due to the changes to buy-to-let taxation, that will kick in from April this year.

The IFS warned the changes would could deter middle class investors, saying: “This clearly weakens the incentive for higher-rate taxpaying landlords to use a mortgage to finance their investments, and for (potential) landlords to invest in buy-to-let housing at all if they need a mortgage to do so.”

The report furthermore suggested that a move by the Chancellor to limit the maximum amount that can be saved into a pension in a person’s lifetime had created instability.

Starting from April, the lifetime limit will decrease from £1.25m to £1m, whilst the yearly limit in savings will drop and a sliding scale – with a cap of £40,000 for those earning up to £150,000, sliding down to a limit of only £10,000 for anyone making £210,000 or more.

The IFS said: “It is not clear why someone with an income of £150,000 should be able to put £40,000 into a pension but someone on an income of £210,000 should only be able to put £10,000 into a pension.”

However, the study also pointed out that with changes to taxes on savings, dividends and raising the personal tax allowance to £11,000 means a significant number of people could live completely tax-free for up to £28,000 in income.

Report co-author Stuart Adam said: “Taxes and charges can significantly change the relative attractiveness of different savings options. If people are unsure about how taxes and charges might change, their decisions become even harder.”

Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants, said the Government was trying to discipline those who worked hard while constant changes meant it was impossible for savers to plan for the future.

He added: “Higher-rate taxpayers are being fleeced by the Government. Every change has an adverse impact on people who do well for themselves. They work hard and are being punished for it by having the relief they have being withdrawn.”

Retirement expert Alan Higham, of, said the planned and existing changes risked putting off people saving altogether.

He said: “If the Government makes it tax inefficient to save for retirement, people will simply stop saving for retirement, which will build up a big problem for the state in the future.”

A Treasury spokesman stated it was still thinking about all options on pensions tax relief, including keeping the current system.

Source: This Is Money

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Is a bigger home the better pension?

Is a bigger home the better pension?


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