Treasury officials are looking at changes to pension allowances and tax reliefs in November Budget as a means of raising funds to help pay the Covid bill.
According to reports in the The Daily Telegraph, officials are mulling the pros and cons of reducing the lifetime allowance £1m to £800,000, introducing a flat rate of tax relief on contributions, or introducing a new taxation on employer contributions.
These discussions were said to be at an “exploratory stage”.
Not surprisingly the pensions industry has protested strongly that such changes could cause lasting damage to the retirement prospects of many savers and risk undermining confidence in the pensions system.
In recent years there has frequently been speculation about changes to pensions tax relief. It is thought complications around implementation and a risk of alienating core voters has resulted in Conservative chancellors drawing back from radical change. Raising additional by reducing the lifetime allowance may be seen as an easier option.
However there is the risk that this will involve a u-turn for the Chancellor Rishi Sunak, who only recently extended this complex rules around the tapering of the annual allowance in a bid to stop higher paid NHS staff being hit with unwanted tax bills.
AJ Bell senior analyst Tom Selby says: “The Treasury appears to be rolling the pitch for another raid on people’s pensions, this time as part of an economic package to fund the UK’s Coronavirus recovery effort.
“Given the parlous state of the UK’s finances, further speculation about the future of all areas of Government spending – including retirement savings incentives – was inevitable.
“However, all three of the pension tax reforms apparently in the Chancellor’s sights would be hugely risky, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment.”
He adds that there introducing a flat-rate of pension tax relief has frequently be touted as an idea by think-tanks and officials, but says implementation provides “genuine practical challenges” and would most likely result in tax rises for public sector workers in DB schemes. Proposing tax rises for NHS staff so soon after the pandemic may be deemed politically risky.
Selby adds: “The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the Government increased their pension costs just as many attempt to recover from a nightmare year.”
Aegon pensions director Steven Cameron points out that making changes to tax relief, at a time when there is no alteration to the pensions triple lock risks squeezing the pensions of the working age population and increasing intergenerational unfairness.
He says: “Once again the prospect of reforming pension tax relief for higher earners is being floated as a means to restore holes in the government’s finances.
“What’s different this time is that the state pension triple lock is also firmly in the spotlight with recent earnings anomalies likely to grant current state pensioners a bumper increase next April. Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness.
“Today’s speculation also highlighted the possibility of a further cut to the pensions lifetime allowance. Given this was frozen at the recent Budget any further change would be particularly punitive. The current allowance only buys an annual guaranteed income of around £1,700 a month, which is hardly going to buy a life of luxury.
“On the broader point about tax relief, we aren’t against the principle of a flat rate but any reform would need to be carefully thought through and also balanced against intergenerational considerations. There are broader challenges to reform of tax relief, as they would be highly complex to implement, particularly for defined benefit schemes. This means individuals and pension schemes would need sufficient time to adapt and we’d encourage the government to take a long-term view on the implications any changes.”
