The rumour mill continues to swirl about how the pension landscape could be impacted by the October Budget.
Chancellor Rachel Reeves has warned of tax rises to combat a £22 billion shortfall in public finances and after changing the rules around which pensioners can get the winter fuel allowance, there are fears that retirement savings could also come under the spotlight.
The government has launched a review into making the pensions market more efficient for savers but there are warnings that the first Budget under the new Labour government on 30 October could also introduce changes to perks for wealthy savers and retirees.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
While the government has committed to maintaining the triple lock as well as the lifetime allowance on pension saving, there are plenty of other reforms that could save the Treasury money.
Latest Videos FromMoneyWeek
Here is how changes to some of the most popular pension perks could affect you.
Risks of Labour's pensions market review
One of the key pension market reforms under consideration is encouraging further investment into UK assets to boost growth across the country.
While this approach could stimulate short-term economic growth, Jack Munday, chartered financial adviser at Saltus, warns of potential risks.
"There is a danger of a 'set and forget' mentality, where large scale asset management lacks the ability to be truly targeted, leading to asset drift - where changes in market prices lead to unintended changes in the balance of a portfolio - and increased risk," he says.
"Moreover, reduced competition in the marketplace could result in price surges, with the most dominant players exerting more control."
Will higher-rate pension tax relief be scrapped?
Reeves is by no means the first chancellor to be rumoured to be planning to restrict pension tax relief.
Despite regular suggestions ahead of previous Tory government Budgets that relief for higher earners could be scrapped and restricted to the basic rate of 20%, the policy has never made it into the red book.
But with the net cost of tax relief on pension contributions hitting £48.7 billion in 2022/23, according to HMRC data and almost two-thirds from higher rate relief, Reeves may well be tempted to take action.
Limiting up-front relief to the basic rate of income tax would be a £15 billion a year tax rise, according to the Institute for Fiscal Studies (IFS).
“At worst the Chancellor could scrap pension tax relief altogether in the Budget, although this would be an extremely unpopular move,” says Tomm Adams, head of international pensions and benefits at Blick Rothenberg.
“She could also introduce a flat rate tax relief of 30%, substantially drop annual relievable allowance, or reduce the 25% tax-free lump sum to 20%. Any of these would dissuade long-term pension savings as the tax paid on them would effectively increase.”
If the chancellor does go after pensions, adds Adams, introducing a flat rate tax relief of 30% feels in line with hitting claims that the changes would hit the “broadest shoulders.”
He says: “The average employee in England or Wales, who earns under £40,000 and is a 20% marginal taxpayer, would get more tax relief than before. But that would be fully subsidised by higher earners with the excess going to the Treasury.”
Changing pension tax relief rules would also be a nightmare for payroll departments, especially if introduced immediately.
“An immediate change on 30 October could also have unintended consequences where contributions are taken out of October payroll but not physically transferred into pension pots until the start of November – this would be a significant oversight, leaving many individuals caught out by an unexpected loss of tax relief,” adds Adams
Ed Monk, of Fidelity International highlights that Labour has previously ruled out this policy- although that doesn’t mean they can’t change their mind - adding: “Any change risks being unpopular and could be very difficult to implement, not least because it could create a system where tax on withdrawals is at a higher rate than the relief on contributions - destroying the incentive to save into a pension at all for some people.”
Changes to tax-free withdrawals?
Currently, retirees can take 25% of their pension pot tax-free once they are ready to access it.
Known technically as the pension commencement lump sum, it is one of the main perks of retirement saving.
The IFS has suggested removing the incentive for those with larger pensions, which would raise £2 billion per year, “with losses concentrated among the relatively wealthy.”
“Reducing the amount that can be taken tax-free from £286,275 to £100,000, for example, would affect about one-in-five retirees, and almost half of those who had been employed in the public sector, but would mean about 40% of pension wealth lost the benefit of the tax-free component,” the thinktank says.
But Adams adds that a change to the treatment of the tax-free lump sum would be particularly unfair on people who have already built-up long-term savings for their retirement.
“Most pensioners rely on income outside the state pension which is woefully behind the average across Europe, and it would feel as if the government is punishing them for taking good care of their finances,” he says.
The end of the inheritance tax exemption?
Pension savings are currently excluded from someone’s estate when calculating inheritance tax.
This means they can be passed on tax-free.
But the IFS suggests scrapping this exemption, while potentially pushing more estates into the inheritance tax trap, could give the Treasury a boost.
“Ending this inequitable treatment could raise several hundred million pounds a year in the short term, rising quickly thereafter, potentially to as much as £2 billion a year, though probably less, as the introduction of ‘pension freedoms’ in 2015 means more and more people will be dying with pension wealth,” says the IFS.
Will the state pension age rise?
The state pension age is currently 66 and is due to rise to 67 between 2026 and 2028.
A review of the state pension age was delayed in the spring and raising the age faster could save the government money on state pension payments.
Munday warns that raising the retirement age may keep more people in the workforce, “but it is more likely to feel like a forced measure rather than an incentive for older workers.”
Don't panic about your pension
It is hard to plan for your retirement and put a financial plan in place when you don’t know what the tax environment will be like in a couple of months.
But Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warns making rash and rushed decisions can lead to regret.
For example, you may miss out on investment growth and further tax relief if you take too much out of your pension now
“Deciding to take an income earlier than you intended because you're worried about how the tax treatment might change could also come back to bite you,” she says.
“Flexibly accessing your pension will trigger the money purchase annual allowance, and this could slash the amount you can pay in from as much as £60,000 per year to just £10,000. It’s a move that could seriously hamper your attempts to rebuild your pension at a later date because too much has been taken too early.”
