The Spring Budget will be announced next Wednesday, and AJ Bell’s experts explain the key points to watch for in Chancellor Jeremy Hunt’s statement.
An accelerated state pension age hike is on the agenda. The state pension age will rise to 67 by 2028 and then to 68 by 2046, according to the existing plan. However, earlier this year, speculations circulated that the administration would speed up the scheduled increase to age 68 to sometime in the 2030s.
AJ Bell head of retirement policy Tom Selby says: “This would represent a colossal political gamble, for the obvious reason that generally there aren’t many votes to be won by telling millions of people they are going to receive their state pension later than they thought.
“The most recent data adds more fuel to this potential fire, with average life expectancy in the UK dropping and projections of future longevity improvements scaled back. While it is difficult to be definitive about the cause of this shift after decades of near continuous life expectancy rises, the pandemic will inevitably have been a significant factor.
“From the Treasury’s perspective, bringing forward the planned increase in the state pension age to 68 could be a huge money spinner, likely raising tens of billions in revenue – funds that are desperately needed in the wake of Covid-19 and the costly energy support package. The big question is whether No.10 agrees this Exchequer boost is worth the inevitable pain at the ballot box.
“For savers, the uncertainty is another reminder that while the state pension provides a valuable foundation upon which to build your retirement plans, both how much you receive and when you receive it remains at the whim of politicians.
“This is one of the reasons it is vital you build your own retirement pot, taking advantage of the retirement savings incentives on offer, any employer contributions available and tax-free investment growth.”
The impact of an accelerated state pension age increase to 68 would depend on the timing of that rise.
Selby says: “An accelerated rise in the state pension age to 68 could also mean the minimum private pension access age or ‘normal minimum pension age’ (NMPA) could increase sooner. The NMPA is due to rise to 57 in 2028 and is then expected to remain 10 years away from the state pension age.
“The process the government will follow for increasing the NMPA is far from clear, however. The rise from 55 to 57 has been accompanied by a complicated ‘protection’ regime which means, depending on the wording of your pension contract, you may be able to retain a minimum access age of 55.
“This will create huge unwelcome complexity in an already overly complex pension system. We can only hope that the next NMPA increase is undertaken in a way which keeps unnecessary complications – not to mention administration costs – to a minimum.”
Another topic to watch out for this week is pension tax relief, but Selby says there is currently no evidence that the Treasury is considering plans to eliminate higher-rate pension tax relief or further limit the availability of tax-free income, or both.
Selby says: “It’s been suspiciously quiet on the pension tax relief front in the run-up to this Budget. Usually at this stage we’d have had at least one story suggesting the Treasury is weighing up proposals to scrap higher-rate pension tax relief or further restrict the availability of tax-free cash – or both.
“The biggest impediment to either reform is likely to be raw politics. Scrapping higher-rate relief would be deeply unpopular, particularly with traditional Conservative voters, while tax-free cash is one of the few parts of the private pension system most people genuinely understand and value. Either measure would inevitably result in unwelcome headlines about a ‘pension tax raid’.
“There are also practical challenges which would be difficult to overcome. Scrapping higher-rate relief would be particularly complicated for defined benefit (DB) schemes, with members affected presumably being hit with a tax charge as a result. Any move to further limit tax-free cash, as well as being a potential vote loser, would need to address the question of how rights already built up under the existing system are protected.
“There are alternative options which might be marginally less controversial. For example, the Institute for Fiscal Studies (IFS) has called for IHT and income tax to be applied to pensions on death. While this would inevitably result in some negative headlines around the application of a ‘pension death tax’, the rules – which mean pensions can in certain circumstances be inherited completely tax-free – are undoubtedly generous.
“Once again, if the government went down this road there would again be a big question over how those who have contributed to pensions on the basis of the existing death benefits regime are protected.”
Selby says that the Chancellor is coming under increasing pressure to solve particular problems with the tax system that run the risk of discouraging people from returning to work.
He says: “The most obvious of these is the money purchase annual allowance (MPAA), which punishes those who have flexibly accessed taxable income from their retirement pot with a £36,000 reduction in their annual allowance, from £40,000 to just £4,000. Triggering the MPAA also means you lose the ability to carry forward unused annual allowances from the three previous tax years.
“AJ Bell wrote to the Treasury in November last year calling for an urgent review of the MPAA, while a joint-industry letter backing an immediate rise in the MPAA to £10,000 landed on the doorstep of Number 11 Downing Street last week. If the government is serious about tackling labour market shortages and getting over 50s back to work, addressing this pension tax penalty feels like a no-brainer.
“The Chancellor is also facing ongoing calls to ease the pressure on the NHS, with pension tax rules which have pushed thousands of senior doctors to retire early at the heart of the controversy. Some reports have suggested increases to the lifetime and annual pension allowances, which currently sit at just over £1m and £40,000 respectively, are being considered.
“It may be that short-term adjustments are deemed necessary to deal with the immediate challenges engulfing the health service. Over the longer-term, policymakers should consider scrapping the lifetime allowance for defined contribution (DC) pensions altogether as part of a radical simplification of the system.”