Steven Cameron, Pensions Director at Aegon, comments: “The Budget on 15 March will be interesting for a number of reasons. First, it takes place before most of the ‘recovery’ measures in the November 2022 Budget come in force, including a raft of tax increases. Secondly, it comes shortly after the Chancellor unveiled his 4 E’s of economic growth - Enterprise, Education, Employment and Everywhere - with details promised in ‘future Budgets’. And thirdly, the Chancellor will no doubt be all too aware that the next General Election isn’t that far off.
“Jeremy Hunt’s November Budget was a case of ‘needs must’, with the key aim of regaining stability and confidence in the UK’s finances. But after the series of policy U-Turns following the earlier mini-Budget, this March statement may give clearer direction on the way ahead for savers and investors. The drive to get inflation down will no doubt remain central.”
Changes to pensions tax limits urgently needed if Chancellor truly wants over 55s to stay in or return to work
“Under the Employment pillar of Economic Growth, the Government wants to reduce economic inactivity, including amongst the over 55s, where the pandemic prompted a sharp increase in early retirement. But some pensions tax rules discourage over 55s from remaining in or returning to paid employment.
“The pensions lifetime and annual allowances have been cited as reasons for higher earning doctors leaving the NHS because extra pension entitlements in their defined benefit pension schemes are leaving them with significant tax penalties. An increase in the lifetime allowance, the maximum you can hold in your pension on a tax-favoured basis, from the current £1,073,100 to £1.5m, would be helpful. So would more flexibility in the £40,000 annual allowance, the amount you can pay in each year. These shouldn’t be restricted just to NHS doctors.
“But even more pressing is a need to increase the Money Purchase Annual Allowance. Anyone over 55 who has used the pension freedoms to access their defined contribution pension flexibly, possibly during the pandemic or to get by during the cost of living criris, faces a severe cut in how much then can subsequently pay into a pension. Rather than the standard £40,000 Annual Allowance, it falls to £4,000 a year for personal contributions, employer contributions and tax relief combined. Anyone considering returning to work could find they can’t take full advantage of the pension that comes with that future employment. We are calling for an immediate increase to £10,000 a year to stop the pensions penalty many face if returning to work.”
Too soon for radical reforms to pensions tax relief which risk unintended consequences
“Ahead of every Budget, there’s speculation around a radical reform of pensions tax relief, either to save the Chancellor money or to spread reliefs more fairly. One option would be to give everyone the same rate of tax relief rather than the current system which gives higher and additional rate taxpayers more relief than basic rate taxpayers.
“But unlike changes to allowances, this would be highly complex to implement. There are particular challenges for defined benefit schemes and major complexities around how individual and employer contributions would be treated. Rushing into changes could lead to unfairness as well as unwelcome changes in savings behaviours.
“I would be very surprised to see any radical reforms ahead of the next General Election. But if income tax thresholds remain frozen until 2028 as planned, we’ll have potentially millions more individuals paying higher rate tax and getting higher rate tax relief. So at some future point, the system may need overhauled to make it fit for purpose.”
State pension age could be increased to 68 sooner than planned
“In his November Budget, Mr Hunt announced the state pension triple lock would be retained, meaning a 10.1% increase for state pensioners this April. This comes at a high cost which is met from the National Insurance contributions of today’s workers.
“At the same time, the Chancellor said a review of state pension age would be published early in the New Year, which could now mean Budget day. On affordability grounds, the Government may argue the state pension age has to be increased to 68 sooner than currently planned, possibly in 10 to 12 years’ time. Increasing it even sooner would simply not give people enough time to plan ahead.
“The higher the state pension age is, the more difficult it will be for some people to remain in work till then, increasing the benefits of offering individuals the option of starting state pension earlier at a reduced level to make it cost neutral.
“An increase in the state pension age to 68 could also prompt the Government to increase the earliest age at which pensions can be accessed to 58. It tends to be set 10 years earlier than state pension age and is already increasing from 55 to 57 in 2028, creating massive complexities.”
Further encouragement towards less liquid investments and ‘productive finance’
“The Government is already advancing a wide range of measures to encourage more money into less liquid investments and ‘productive finance’. The aim is to stimulate UK economic growth, as well as offering institutional and individual investors the chance to diversify into new areas and achieve potentially higher investment returns. There’s a high chance there will be further mentions of this on 15 March and perhaps some further initiatives to add to those already underway. If individuals are to be offered the chance to invest in these, it will be important they have access to financial advice.”
|
