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We are about eight weeks out from the budget and the rumour mill has already gone into overdrive. The chancellor and prime minister’s warnings of hard decisions to come have prompted a flurry of speculation as to whether Halloween will come a day early and unleash all kinds of financial horrors.
The government has already said it doesn’t want to burden working people, so we aren’t expecting changes to income tax or national insurance. However, this means we could see pensions put under pressure. Areas that could be for the chop include the annual allowance and pensions tax relief.
The annual allowance – the maximum you can put into a pension and still benefit from tax relief – once stood at a whopping £255,000 before being pruned right back to £40,000. It was then increased to £60,000 for the 2023/24 tax year. Could it be chopped back down to £40,000 again?
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Pension tax relief has also got its fair share of headlines, with much made of comments that chancellor Rachel Reeves made several years ago around moving to a flat rate of tax relief, say 30%.
Such a shift would actually be good news for basic rate taxpayers who currently get 20% relief on their contributions but would be a blow to higher and additional rate taxpayers who have enjoyed tax relief of 40% and 45%, respectively. However, when pressed on this some weeks back, sources said such a move was not current Labour policy.
It’s fair to say that all of this is just speculation and right now we really don’t know what the chancellor has got lined up come 30 October. In the meantime, make the use of the allowances that are available to you right now to help you build your retirement resilience.
Read more: What is pension credit and are you eligible to claim?
We hope that any changes the government does decide to make – whether on pensions or otherwise – are done in a considered way that ensures people remain incentivised to save.
The changes to the pensions annual allowance are just one example of the many changes we’ve seen to the system in recent years and it’s no surprise if people get confused about what they can or can’t do.
The recent speculation around whether Labour might reintroduce the lifetime allowance also made many people hesitant to make further contributions to their pension until they got more clarity.
If people think the tax framework is going to be changed on a regular basis, then this undermines confidence in the system as people don’t know how their hard-earned savings will be treated in the future. The ongoing pensions review must deliver a system that offers this confidence and helps people plan for the long-term.
Helen Morrissey is the head of retirement analysis at Hargreaves Lansdown.
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