Leaked Government plans to tax pensions to plug the huge hole in public finances left by the Covid-19 pandemic, will knock confidence in pensions and could increase pensioners reliance upon state benefits, experts warn.
According to reports in The Telegraph, Treasury officials are drawing up plans for a pensions tax raid in the Autumn to help pay for the vast spending during the pandemic.
Ideas being touted include reducing the lifetime allowance (LTA) from a little above £1 million to £800,000 or £900,000.
Tom Selby, senior analyst at AJ Bell, said: “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, Selby said pension tax reforms would be “hugely risky”, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment.
A flat-rate pension tax relief would also likely result in tax rises for public sector workers in defined benefit schemes, including many NHS staff, said Selby.
“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.
“More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, inadequate retirement saving remains one of the most significant long-term challenges.
“Any further reforms – and in particular cuts in pension tax relief – need to be mindful of the impact on savings incentive over decades.”
Andrew Tully, technical director at Canada Life, believes moving the goal posts will make savers nervous going forward.
Tully said: “This proposal from the Treasury simply sends the wrong signal to savers trying to do the right thing at a time when we should be encouraging people to save for retirement, rather than threatening to penalise them with an arbitrary tax charge.
“The last 10 years has seen the lifetime allowance fall from £1.8 million to £1 million, gradually increase by inflation and now frozen again. These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving. Instead of constant tweaks we need stability to give people confidence to save for the long-term.”
Kay Ingram, public policy director at LEBC, believes the Government should abolish the allowance for defined contribution savers and rely on the annual allowance to control the amount of tax relief any one person may benefit from. At the same time, the annual allowance for defined benefit schemes should also be scrapped so that doctors and other key public sector workers are not discouraged from working extra shifts for fear of an unwelcome tax bill.
According to Ingram: “The Treasury want pension savers to invest in high tech long-term asset classes. If they reduce the LTA there will be even less incentive for pension savers to take on the extra investment risk this involves where success will result in a large tax bill but losses will not be underwritten.
“If these rumours are true the Treasury appears to be suffering from schizophrenia in its pensions tax policy making and needs to adopt a more coherent approach.
“Constant tinkering with pensions savings tax only undermines the incentive to save for the longer term. Short-term measures will breed a generation of pensioners whose spending power in retirement will be reduced to a basic standard of living, relying more and more on benefits to meet their needs.
Investors need to take action
Nigel Green, CEO of deVere Group, urged investors to take steps to mitigate the impact of the future raid on pension savings, warning that many savers will be unaware of how the changes could impact them.
“It would be a slap in the face for those who have worked hard and saved hard, prudently putting money aside in order to be able to enjoy their retirement with loved ones.
“There’s a much, much bigger cohort of people who should be taking action now to mitigate the financial hit of the possible slashing of the lifetime allowance. It’s not just those who already have a pension over £1 million. Others need to look ahead and assess if future contributions and investment growth could drag them into a position in which they’ll be above the threshold.”
Green said that in addition to impacting savers, a further reduction in the lifetime allowance would be counter-productive for the economy.
Green added: “This move would serve as a disincentive to save as much as possible for retirement – and therefore it could be harmful to Britain’s long-term economic success.”