We are approaching the date of the new Labour Government’s first budget and not a day passes without media speculation (some would say near hysteria) on what that budget will bring. We know the Government has already set out its store by referencing a £22bn black hole, a figure disputed by its predecessors and it has already indicated that it might review the current pension tax relief system, says Steve Berridge, technical manager at IFGL Pensions.
So, how do you raise revenues when you have committed in your manifesto “not to raise the taxes of working people?”
In terms of the pension framework, there are several options, all of which could be problematic.
The first one is the relievable contribution system. It is speculated that the chancellor might bring in a single priced tax relief on contributions, just the 20% basic rate and perhaps also a single rate when income is paid. This potentially might raise significant revenue and some argue would be fair, as currently those who arguably least need it, receive very generous tax benefits on pension contributions.
However, it would be tricky from a political perspective, given the need to maintain key public sector staff such as GPs and consultants who benefit from higher rate relief on their DB pension schemes, and who would face ‘real time’ tax bills potentially if such a system were implemented. Others argue that moving away from marginal rate relief would undermine the point of pension saving for those at medium and higher income levels. Such a change would also be extremely difficult to implement, especially with occupational schemes operating the net pay system.
A second idea is that they might make employers pay National Insurance on the contributions they make to workplace pension schemes. Currently such contributions are exempt, as are a good chunk of employee contributions thanks to salary sacrifice schemes (where Income Tax and National Insurance are saved on such payments).
The most controversial change muted is a reduction or in the extreme, removal of the current pension commencement lump sum, which provides a 25% tax-free cash amount on pension savings, capped currently at £268,275. Could that be capped at £100,000 or even lower?
The problem with this change is 1) that it will arguably affect some of those “working people” the Government promised to not disadvantage and 2) it will trigger a mass exodus of pension savings between the date of the budget and the likely effective date, which one assumes would be April 6 2025. This risks both adverse harm to the pension industry and poor customer outcomes.
Perhaps the least unfair change would be a cap to the current unlimited levels of pension savings that can be sheltered from Inheritance Tax.
It is a quirk that whilst the nil rate band for IHT ends at £325,000, theoretically an individual can pass millions of pounds of pension savings to their beneficiaries and avoid 40% IHT charges altogether (though larger values may be subject to other pension taxes like the new Lump Sum Death Benefit Allowance, or beneficiary income tax for those pension savers who die aged over 75).
So, there are numerous choices available to the chancellor, but she must steer a careful path between raising needed revenues and reducing the already in many cases insufficient funds which are being committed towards pension saving, as we approach an era when many will retire with completely inadequate private pension income.
In the meantime, financial advisers and pension providers are facing a volume of queries from customers seeking to take pre-emptive action based on rumours and speculation – which may not come to pass. One can only hope that caution is counseled to avoid an ‘act in haste, repent at leisure’ impact on customers valuable retirement savings pots.
This budget promises to be the most interesting and potentially controversial in years. We are already seeing a large number of investors removing their tax-free cash sums, so we simply hope that whatever action is taken is done in a fair and decisive manner and at the very least removes the uncertainty and speculation which is not healthy for either the public or the pension industry.
By Steve Berridge, technical manager at IFGL Pensions
