There’s a lot that’s likely to change about your pension in the near future, which in turn will have an impact on all sorts of other factors regarding savings for your retirement. Depending on what changes the government imposes on how pensions are taxed and the amount of tax relief allowed on pension contributions, you may end up needing to pay considerably more each month towards your pension, or even end up working several years longer before you can retire.
One idea that the Chancellor was toying with in 2015 – and which many predict he may still impose this year – was a change to make pensions more like ISAs. Under the current system, contributions are tax-free when you pay them into your pension, but are then taxed whenever you make a withdrawal.
The suggested change would essentially reverse this process: any pension contributions would have been taxed before being paid in, but would then be subject to no further taxation when a withdrawal is made. As stated earlier, this proposed shift would make a pension very similar to an ISA, which could spell the end of pensions as we know them. It’s predicted that many earners may move away from a new and unfamiliar form of pension in favour of the well-established ISA system for their nest egg.
According to a survey carried out by a leading online investment site, one in three people said they would move their savings to an ISA should the proposed taxation changes be brought in. Only 20% of people said they would continue putting their savings into a pension at the same level. Another popular alternative that many suggested they would consider is investing in property rather than placing their money into any form of savings scheme.
As George Osborne has already stated that he’s open to “radical change” when it comes to the pension system, it’s possible that he may opt to scrap pensions altogether, forcing earners to save for their retirement in some other way. Only time will tell, as an announcement on the future of pensions is expected soon, possibly as part of March 2016’s Budget.