Wealthy pensions’ war chest to be stripped of benefits
Britain’s higher earners are set for another nasty shock as a result of the chancellor’s pre budget report proposals to hike the top tax rate to 45%.
Around 290,000 people in the UK earn £150,000 or more – the point at which the new rate kicks in.
The new rulings, announced last month by chancellor Alistair Darling, could result in a drop of 37% in total tax benefit they receive on their pension investments, warns high net worth wealth manager HFM Columbus.
Charlie Walker, director of HFM Columbus, said many of his wealthy clients are making plans to leave the UK following the proposals.
He said that without rigorous tax planning, investments in pensions will be seriously affected.
An investment of £100,000 by a top rate taxpayer into a pension actually “costs” £60,000 at current tax rates. After taking their tax free lump sum of £25,000 at the age of 55 they are left with £75,000 on which they will currently pay tax at 40%.
In simple terms this leaves them with £45,000 less costs, making a total return of £70,000 for total costs of £60,000.
He said: “For those who are still earning at the top rate – and a great many 55 plus -year-olds are likely to still be in this position – the effects of the raised tax threshold of 45% will greatly reduce the tax benefit to which they have so far been entitled.”
Under the new regime, after taking the £25,000 tax free cash from a £60,000 net investment, there would be an increased rate of 45% tax to pay on the balance of the fund of £33,750.
He added: “So instead of making a total return of £70,000 on an investment of £60,000, the investor is left with just £66,250 – a loss of tax benefit of 37.5%. If the fund had grown in the time between investment and taking benefits and the income is taken over 30 years, the effect of the surprise negative tax bombshell will be even more exaggerated!”
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