"Whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached. "
- Mike Ambery, retirement savings director at Standard Life
As pre-Budget leaks start to trickle out, it has been reported that the Chancellor is backing away from reform of tax reliefs on pension contributions because of the probable impact on the public sector.
Today’s Times reports that plans to reform pensions tax relief for higher earners as part of the Budget have been reconsidered.
Other pension tax measures are still possible, but this could switch the focus back towards capital gains tax and inheritance tax as Rachel Reeves starts this week to submit headline measures to the Office for Budget Responsibility ahead of October 30th.
Ian Dyall, head of estate planning at Evelyn Partners, commented: "The taxation of pension pots at death looks like it’s in the crosshairs at the Budget now.
"Just a year ago the talk was all about whether the Conservatives would cut or even abolish inheritance tax. But the tables have turned on death duties in the last 12 months, and particularly since the General Election, as Downing Street has admitted the need for more tax rises.
"Rachel Reeves is not short of encouragement from think-tanks, a couple of which are keen that IHT "loopholes" should be closed, or that wealthy families should be prevented from making the most of certain reliefs. The problem is, one person’s loophole is another’s legitimate relief – or in the case of some family businesses, another’s lifeline."
Claire Trott, divisional director of retirement and Holistic Planning, said: “We welcome any clarity on speculation ahead of the Budget, as rumours can have a significant negative impact on people’s ability to make informed decisions, often leading to poor outcomes. The reported ruling out of flat rate tax relief isn't surprising—while it sounds straightforward, past consultations including in 2016, have shown it's a costly and complex fix, particularly for higher and additional rate taxpayers who would face taxation on employer contributions.
“We would also welcome similar clarity on proposals from some think tanks about reducing the maximum tax-free cash allowance. Speculation around these changes is driving behaviours, which could result in people withdrawing excessive funds from pensions, potentially risking reduced retirement incomes. Moving money from a tax-privileged environment into one where growth and income are taxed, and potentially pushing estates into inheritance tax (IHT) liability, can have significant implications. With the maximum standard tax-free amount close to the IHT nil rate band, many could find themselves crossing tax thresholds they hadn't anticipated. Decisions shouldn’t be made in isolation, and seeking professional financial advice is crucial to navigating these complexities and avoiding costly mistakes.”
Mike Ambery, retirement savings director at Standard Life, commented: "Changes to income tax relief are a potentially significant revenue raiser but come with two major challenges. Firstly, they would by highly complex to implement and secondly, they come with political downsides given their knock on implications for public sector workers in particular. The Chancellor will be assessing many ways of raising revenues and whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached.
"Pensions are long term by their nature and ideally any changes would be considered as part of the government’s upcoming pension and adequacy review, so that the different aspects of pensions system could be viewed in the round but clearly there is some pressure on the nation’s finances in the short term which may make this a challenge."
Steven Cameron, pensions director at Aegon, added: “There has been speculation that Chancellor Rachel Reeves might make changes to pensions tax to help plug the gap in the nation’s finances. There are now reports that she no longer plans to change pensions tax relief on personal contributions. Individuals currently receive tax relief at their highest marginal rate of income tax, but this might have been changed to a flat rate, somewhere between the basic and higher rates of income tax.
“A flat rate of relief of say 30% would have been a boost for basic rate taxpayers, giving them extra support from Government. But higher and additional rate taxpayers would likely have faced a double whammy – less generous tax relief on their personal contributions and a new tax bill linked to employer pension contributions.
“Currently, individuals can ‘do a deal’ with their employer to sacrifice some of their salary in return for a higher employer pension contribution. If someone paying 40% income tax saw the tax relief they received on personal contributions cut to 30%, then to avoid losing out, they could simply use this salary sacrifice approach. That would defeat the Government’s aim of collecting more in taxes, so it’s highly likely they’d face a new tax bill to make up the difference - say 10% of their employer contribution.
“In some schemes, and notably defined benefit public sector schemes, employers pay very substantial contributions. Employer contributions could be worth 15% or more of pay. Here, an individual earning £60,000 might be benefitting from an employer contribution of £9,000 a year and could be landed with a tax bill of £900. This wouldn’t just affect particularly highly paid individuals – it could also apply to the likes of teachers and nurses whose pay takes them above the higher rate tax threshold, which in England has been frozen at £50,270. It’s set at a lower level of £43,662 in Scotland.
“The Labour Government has been keen to resolve pay disputes in the public sector so introducing a new tax bill linked to pensions would not go down well to put it mildly. But it would be extremely divisive if defined benefit public sector pensions were left unchanged and new rules applied to other pensions.”
