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The budget rumour mill is in full flow with speculation mounting as to what may or may not happen on 30 October. One bit of good news for pension savers is that it looks like a move to introduce a flat rate of tax relief is off the table following concerns about the impact it would have on public sector workers.
The news will no doubt be greeted with a sigh of relief by public and private sector workers alike. This has not been officially confirmed, but the introduction of a flat rate of relief would have been highly complex, expensive and brought further confusion to an already tangled system.
Other options remain on the table, however.
Tax-free cash
One of the most likely potential options could be reducing the amount of tax-free cash people can take from their pension when they retire. This is something that has caused a lot of concern with people looking to take their tax-free cash now — a move that could have huge impact on their retirement.
We’ve already seen tax-free cash tinkered with — it was reduced to a maximum of £268,275 by the last government. This has prompted further speculation as to whether it would be eroded further in future. These current rumours haven’t helped with even people whose tax-free cash entitlement is well below this wondering what the future holds and potentially making decisions they may come to regret.
Read more: What is income drawdown and how can you use it to plan your retirement?
Ripping money out of a pension now potentially deprives it of future investment growth and could leave it subject to a whole host of taxes that it otherwise might not be, such as inheritance, capital gains and dividend tax.
We could also see people try to reinvest surplus tax-free cash they’ve taken back into their SIPP and potentially fall foul of recycling rules that clobber them with a fine. Even if the money is put in a bank account there is a huge risk its purchasing power is eroded over time by low interest rates.
This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging. People need certainty to make long-term plans and this risks knee jerk reactions. The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.
Inheritance tax treatment of pensions
Another potential budget target is the inheritance tax treatment of pensions. As it currently stands in most cases a pension is treated as being outside of a person’s estate for inheritance tax purposes. This sets it apart from ISAs and can lead to people running down other savings in retirement before touching their pension which can then be passed on to loved ones.
Making pensions subject to inheritance tax could potentially raise a decent chunk of money for the government and incentivise people to spend their pot during their lifetime. We could see people opting to give away more gifts in their lifetime to family as a means of mitigating this tax which could play a huge role in helping people get onto the property ladder.
Employer national insurance
The issue that has been less talked about in the press is employer national insurance being levied on workplace pension contributions. As it currently stands employers pay national insurance contributions of 13.8% on all earnings above £175 per week but pension contributions are exempt.
This is a nice incentive for employers which looks to be firmly in the chancellor’s sights.
Read more: What we’re expecting to see in the autumn budget
However, such a move does not come without significant drawbacks — it would push up employer costs and the concern is that they could look to recoup this cash either in the form of smaller pay rises or a refusal to increase their pension contributions, both of which spell bad news for people’s financial resilience.
Given the ongoing debate around adequacy and how we can help people better prepare for retirement this could be something of a backward step.
State pension
There has been ongoing debate around how the cost of this vital benefit can be managed long term for a long time. This issue certainly hasn’t gone away but there have been few whispers so far about potential changes.
However, given the government’s ongoing pension review we could well see the debate reignite in the coming months. Any changes made to state pension need to be done as part of a wider overarching review that makes sure the system is sustainable on a long-term basis and helps people plan with confidence.
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