So, now the football season has started again (the close season seems shorter every year), parliament is firmly back after its long recess and the (for once) warm summer draws to a close, thoughts are already turning to the November budget.
Once more, if the speculation is to be believed, Rachel Reeves has pension reliefs and benefits in her sights.
There is no doubt that the Government finds itself in a hole. Namely a budget black hole. After it came to office it claimed to have inherited a £20bn hole in the public finances. This seems to have grown to £50bn this year if reports are to be believed. It has ambitious spending plans and these somehow have to be financed.
We’ve already seen the publication of the Pensions Scheme Bill, confirming that from April 2027 unused pension funds will for the first time be included in someone’s estate for the calculation of inheritance tax purposes. This was announced at the last autumn budget. However, rumours circulate that further culls on some of the tax benefits enjoyed by pensions are likely this autumn.
Think back 12 months ago and the popular press carried almost daily scare stories about the removal of the pension commencement lump sum (the tax-free cash sum to you and me). This prompted panic withdrawals from some quarters and then further controversy after the budget when some of those people who had withdrawn in haste tried to get their pension provider to take the money back (to no avail due to HMRC rules).
It appears that nothing has been learned since that time. As the weeks go by there is almost daily speculation that yes, in this budget, the chancellor might remove or at best cap the tax-free cash sum entitlement. Also, that it might introduce a flat rate of tax relief (heard that one before too).
The problem is that these measures are in a sense tinkering around the edges. It has been estimated that a flat rate of tax relief on contributions might bring in savings of “several billions of pounds a year”. Compare this to the estimated windfall of £7-£8bn that a 1p increase on the basic rate of income tax might bring the treasury.
Unfortunately, however for Rachel Reeves, her “no increase on taxes for working people” and pre-election promise not to raise income tax in this parliament have boxed her into a corner.
Added into the mix are further rumours that a further clampdown on inheritance tax is coming. This most hated of taxes allegedly only affects 4% or 5% of all estates, but that figure is already predicted to rise once pensions are included in the mix. Reducing the nil rate band, or tinkering with the lifetime giving regime might bring savings but they will be relatively small in the grand scheme of things and carry huge political risk – think winter heating allowance cuts.
For advisers then, you have a further tough job on your hands navigating this toxic maze of rumours and discontent. With the tax-free cash sum, obviously many people will be looking to take theirs out in the next few months in case it disappears, but the task here is to look at people’s circumstances with a degree of pragmatism. Taking the 25% tax-free cash sum is not always automatically the best option for everyone.
So, as we move through the dog days of summer, with a strong feeling of deja vu, time for deep breaths and calm before assisting people who could be making very big, possibly live changing financial decisions. The old adage, ‘look before you leap’, has possibly never been more relevant when it comes to the world of pensions.
Steve Berridge is IFGL Pensions’ technical services manager
