The past fourteen weeks have been disastrous for pensions.
Keir Starmer and Rachel Reeves’ alarming warnings about an impending tax bill have ripped to shreds the balanced confidence that savers have started to build around pensions after years of government tinkering.
Britain’s biggest investment platforms say savers have taken emergency preventative measures that could damage their finances in the long term – such as cashing in their pensions early or accumulating more than they need.
Raid: Pensions are too tempting a target for Chancellor Rachel Reeves (pictured) to ignore as a funding source, experts say
And it’s no wonder, given the menu of gruesome options the Chancellor could choose from to plug the £22 billion hole in the public finances.
Pension tax relief reform has finally been ruled out this week.
But pensions are too tempting for the chancellor to ignore as a source of funding, experts say. So what are the other most likely targets in the October 30 budget?
A cut in tax-free pension funds
The chancellor is reportedly considering cuts to tax-free pensions, a move that could immediately affect millions of workers.
The tax-free pension premium is one of the most attractive parts of pension savings. Currently, anyone over the age of 55 (rising to 57 in 2028) can have the first 25 percent of their pot up to £268,275 paid out without any tax liability.
Government officials have asked one of Britain’s largest pension providers to assess the impact of cutting the tax-free lump sum to £100,000, according to The Telegraph.
The move could affect one in five retirees, the Institute for Fiscal Studies think tank estimates. The tax grab could derail the retirement plans of more than two million people, as many will have set aside the lump sum to supplement their income if they retire early or partially. Others may be planning to use it to pay off a mortgage or plan vacations.
The IFS and the left-wing think tank Fabian Society have called on the Chancellor to reduce the benefit. A reduction to £100,000 could raise large sums, they say.
Nicholas Nesbitt, partner at accountancy firm Forvis Mazars, says this is one of the most likely changes the Chancellor will make.
He says: ‘The government could easily reduce the amount of tax-free cash that individuals can withdraw from their pensions.’
Tom Selby, director of public policy at stockbroker AJ Bell, agrees that a cap on tax-free pension money would be simple enough to implement. However, he says it would not generate significant amounts of money for the state this year.
Veterans of the pensions industry say there is a good chance Ms Reeves will be forced to offer protections to savers to safeguard the money already built up in a pension. This means the new rules may only apply to future savings, so it could be some time before the Treasury Department starts seeing any revenue from the tax grab.
Mr Selby said: ‘This measure would not generate money so quickly. Reeves says we have a £22 billion deficit this year. If you limited tax-free cash to £100,000, the money it would generate would come in small increments over time, rather than in a sudden windfall. It wouldn’t be enough to make a dent in immediate funding needs.”
Graham Crossley, an NHS pensions specialist at asset manager Quilter, warns that a cut in tax-free pensions would have unintended consequences for public sector workers, which could lead to many senior doctors and healthcare workers leaving their jobs.
He says: ‘A measure like this could fuel fears among public sector workers that the government is coming to take away their pensions. We could see significant numbers of senior healthcare workers putting forward their plans to retire to avoid the next attack on their pensions.
‘There is a risk that it will ultimately cost more to solve the problems this could cause, such as higher waiting lists, compared to the burden such a move would impose.’
Hit on pensions in the workplace
Leading pensions experts tell me that the easiest, most lucrative – and therefore most likely – change is a new National Insurance Levy on the contribution employers pay to employees’ pensions.
Currently, employers do not pay national insurance for the money they pay into pensions on behalf of their staff.
The Institute for Fiscal Studies (IFS) think tank says this rule ‘needs reform’, adding that if employers were required to pay NI pension contributions at the same rate as wages (13.8 per cent), this would be around £ 17 billion per year. .
Mr Selby said: ‘This seems to be the simplest way to raise money quickly if the Government wants to take money out of pensions. It wouldn’t be a surprise.’
However, Mr Selby says he expects there to be a reduced tax rate on employer contributions, rather than the full 13.8 per cent tax charge.
This is echoed by Robert Salter of tax firm Blick Rothenberg, who agrees that this is the most likely change.
While this would not result in a direct hit to pension savers, he warns that it could lead to employers reducing the amount they pay into their employees’ pensions, or impact future pay rises as companies tackle the new costs. take.
Trade groups including the Association of British Insurers (ABI) and the Reward and Employee Benefits Association (REBA) have warned the government that these cuts would leave millions of workers with a worse pension.
Debi O’Donovan, co-founder and director of Reba, said: ‘Research shows that removing this exemption would make employers’ behavior less generous in the future, at the expense of millions of workers.’
Target: Pensions experts say the easiest, most lucrative – and therefore most likely – change is a new National Insurance levy on employers’ contributions to workers’ pensions
Make pensions subject to inheritance tax
Another option for the chancellor is to make pension pots liable for inheritance tax – a change that experts say could be made overnight.
Unlike other savings or housing, pensions are not currently part of your estate and are therefore not subject to tax.
Nicholas Nesbitt, partner at accountancy firm Forvis Mazars, says a new death tax is one of the most likely changes.
He says: ‘The taxation of pension death benefits has felt abnormal for a long time – you get tax relief on contributions; you get tax-free investment growth and you can pass the money on tax-free upon death.
Given the level of wealth stored in pensions, we expect the new government to tax pension funds on death in the future.”
One option would be to say that the first £100,000 of pension savings is free of inheritance tax, but anything above that would attract a 40 per cent tax bill.
The think tank IFS has urged the government to implement this reform, which it says could raise hundreds of millions of pounds a year in the short term and then increase rapidly – potentially to as much as £2 billion a year.
Tax credit robbery unlikely
Fears that the Chancellor would make a raid over pension tax cuts have been quashed this week as Labor is expected to abandon those plans.
Rumors circulated that Ms Reeves would cut the amount of tax relief that those earning £50,000 or more a year would receive on the money they save for a pension. The tax credit, which is currently paid at your marginal income tax rate, would have changed to one flat rate – probably between 20 and 30 percent.
But the Chancellor is said to have called off her planned pension tax raid after being warned it could impact a million teachers, nurses and other public sector workers.
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