By David Brooks, Head of Policy, Broadstone
With nearly one month to go until the Chancellor stands at the despatch box, Broadstone runs the rule over any potential pension announcements and assesses the likelihood of them making it into the famous red box. (all comments below attributable to David).
Changes to tax relief
This is the main rumour doing the rounds and would have the biggest impact on people saving for a pension but is likely to be the hardest. In brief, the proposal is to change giving tax relief off the top rate of marginal tax someone is paying, and instead set it at a different rate. This could be either a new standalone rate, say 30%, or at basic rate for all.
This would likely be bad news for some higher rate tax payers but better for basic rate tax payers who would see a greater benefit in pension savings. It would also have challenges around salary sacrifice and net pay arrangements and could be very tricky to implement in Defined Benefit schemes so would have potentially major ramifications for public sector workers.
Likelihood? 3/5. Albeit any changes are unlikely to be implemented in the next tax year.
Inheritance tax on pension savings
It has long been seen as overly generous that since 2015, a death before the age of 75 results in virtually no tax on Defined Contribution pension withdrawals while deaths after age 75 see pension benefits paid inheritance tax free.
Changing one or both of these rules would be a relatively easy move and potentially lucrative. This could risk devaluing the benefit of pensions as a savings method and from a technical point of view, there could be complications around trust laws.
Likelihood? 4/5. A reversal of the unusually generous 2015 rules for deaths before 75 is most likely.
Reduce tax-free cash
The lump sum allowance (LSA), introduced in 2024, limits the maximum amount of tax-free payments that can be paid during an individual's lifetime to £268,275
It is estimated that reducing the LSA to £100,000 would impact one in five retirees and raise around £2bn a year in the long run. It isn’t clear if the modelling on this has considered the rights of those members with protection and the additional assumption that there would be another round of protection for those with lump sum rights of more than £100,000 at the date of the reduction.
There could also be technical challenges for members with cash in addition and also funding if income is higher in pensions.
Likelihood? 2/5. A change that would likely bring complaints about decreasing confidence in pensions as a saving concept as tax-free cash is in one of its most recognised benefits.
Reforming the National Insurance system
A few ideas are doing the rounds here such as changing the NI break on pension contributions for employers, charging NI on pension incomes or charging NI on earned income over State Pension.
Given the flexible nature of the percentages and bands used, there are a wide range of outcomes available. IFS estimates a complete change to NI on employer contributions could raise £17bn. This passes the tax burden on to employers and might result in lower pension contributions. Applying NI to pension incomes also seems hard to implement as people would be paying NI twice.
Likelihood? 1/5. The most likely option seems to be charging NI on earned income over age 65.
Increases to mandatory auto-enrolment contributions
Pension adequacy is clearly highly relevant to the Government given it is the focus of the second phase of its Pension Review – which we are yet to see light of.
Mandating larger contributions from employees and employers is seen as key to ensuring people are building up enough savings to ensure a good standard of living in retirement as Defined Contribution pensions take centre stage. With the long-term affordability of the State Pension still a matter of debate, this is an issue that is likely to become increasingly pressing for governments of all colours.
Likelihood? 1/5. Any changes to auto-enrolment will surely be contained within the second phase of the Pensions Review focused on adequacy.
A pensions wealth/investment tax
Always on the hunt for a rabbit the Chancellor could pull out the hat, a tax on investment returns targeted at wealthier pensioners may be an option. Exempting certain assets such as UK equities or UK private equity may be a way for the Treasury to stimulate its productive investment regime while raising money from a) those not of working age and b) those with the broadest shoulders.
Likelihood? 2/5. Would create a lot of disquiet after means-testing winter fuel payments.
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