Five key areas of possible changes to Pensions in the Autumn Budget

Little has been said by Labour on what the budget will contain. We are led to believe there will be change and upheaval, barring a significant leak we won’t know though until 30th October. There are plenty of rumours around pensions and in the King’s speech, a commitment to a “pensions review”. What this means in the longer term, time will tell although there are five key areas which may be looked at within this review and as part of the budget in October.

Tax free cash

The removal of pension tax free cash or reducing the percentage available for individuals has been reported. Rules have already changed here with the access age of pensions moving from 55 to 57 for those born after March 1973 and the Conservative government brought in a cap on the level of tax-free cash individuals are entitled in their lifetime of £268,275. In part these changes are already a significant change to people’s entitlements.

Other than reducing this cap or the percentage of tax free cash available to people, there is little scope to alter the rules here as this would be a significantly unpopular move. Drawing tax free cash pre budget would have IHT implications and would only be appropriate for certain circumstances. It’s likely drawing this is going to have significant impacts to longer term retirement plans and so should be discussed with an adviser to ensure it is appropriate.

Tax relief

Previous chancellors have said that the cost of pension tax relief to the tax system is eye watering and has always attracted speculation in every budget. Currently, those who contribute personally get tax relief to their highest marginal rate and those who contribute from a company can offset contributions against corporation tax. 

Changes to tax relief could be very lucrative and raise as much as £10billion a year according to estimates. 

Introducing a flat rate of tax would improve longer term savings plans for lower earning people and would encourage them to save more but would disadvantage higher earners, having the opposite effect on their savings prospects. With more people being dragged into higher tax bands with frozen thresholds, it could quickly become less attractive for some people. A flat rate would also make salary sacrifice more attractive for higher earners and so having a negative effect on the economy with less tax and NI receipts through PAYE.

Annual Allowance

This has increased in recent years and is currently set at a maximum of £60,000, tapering down to £10,000 for those with adjusted income over £260,000, this is the amount that individuals can save into their pensions each tax year. 

Reducing this will do little to encourage people to save for their retirement and thus putting more pressure on the state and a negative effect on longer term growth prospects for the economy. 

Higher earners in Defined Benefit schemes are very likely to be caught out here due to their inability to tailor their contributions and would be detrimental to a lot of industries.

Lifetime allowance rule changes

When Jeremy Hunt announced the abolition of the Lifetime Allowance in last year’s spring budget, Labour said they would reverse this change and ensure there was a Lifetime Allowance on pensions. This doesn’t appear to be high on the agenda currently and there is little speculation that a reversal and re-introduction is likely. 

Re-introducing this rule would take a lot of time, money and is not forecasted to be a major contributor to the tax system. 

Inheritance Tax

Currently pensions sit outside people’s estates for inheritance tax for both the individual and their beneficiaries. This makes pensions an attractive vehicle to pass wealth on through the generations and whilst we don’t advise on using pensions as a pure IHT planning vehicle, it is a feature that is popular with people.

The IFS is in favour of including pensions within people’s estates and has proposed IHT would be taxed on 80% of the gross funds. This is forecasted to raise minimal amounts of tax, £0.2bn in 2024/25, rising to £0.4bn by 2029/30 and given the relatively small fiscal numbers involved, is seen as low hanging fruit and an easy option to take. This wouldn’t be difficult to administer and so could be put into action fairly quickly.

Whilst there are potentially changes to the pension world and peoples planning, we can only plan with the current rules. It is likely that with any changes, there will be a period to take stock and look at the implications longer term. It is also likely that if there are reductions in allowances, protection will be provided to safeguard the benefits built up within the plans so far.

Our best advice is to not do anything based on speculation and hearsay with the obvious planning opportunity being to make use of allowances before the budget to secure these and the tax reliefs available.

Pensions have been the cornerstone of people’s retirement planning for decades and many of the features we see today are popular and well known. Having a review of your longer term objectives with an adviser to discuss longer term implications of the points raised above would always be the best starting point.

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