With just over a month to go until the autumn budget, independent consultancy Broadstone has identified potential areas where the Chancellor Rachel Reeves could introduce change, and the likelihood of each occurring.
Broadstone said that with Labour looking to plug a £22 billion “black hole” in government finances, pensions could be under the Chancellor’s microscope.
According to David Brooks, Broadstone’s head of policy, the most likely move would be to make changes to the “overly generous” rules around inheritance tax on pensions. Currently, a death before age 75 results in virtually no tax on defined contribution pension withdrawals, while death after age 75 sees pension benefits paid inheritance tax free.
Brooks said: “Changing one or both of these rules would be a relatively easy move and potentially lucrative.” However, he warned it “could risk devaluing the benefit of pensions as a savings method and from a technical point of view there could be complications around trust laws.”
Brooks described the likelihood of the Chancellor reversing the rules as a 4/5 chance.
Broadstone said that from the various pension options available to Reeves, there is also a 3/5 chance that she will announce changes to tax relief.
This would have the biggest impact on people saving for a pension but is likely to be the hardest. The suggestion is to change giving tax relief off the top rate of marginal tax someone is paying and instead set it at a different rate. This could be either a new standalone rate or a flat rate for all.
Brooks said: “This would likely be bad news for some higher rate tax payers but better for basic rate tax payers who would see a greater benefit in pension savings. It would also have challenges around salary sacrifice and net pay arrangements and could be very tricky to implement in defined benefit schemes so would have potentially major ramifications for public sector workers.”
While Brooks said there is the possibility of this happening, it is unlikely to be implemented in the next tax year.
There have also been rumours swirling that Labour could introduce a tax on investment returns aimed at wealthier pensioners. However, Brooks said this is unlikely to happen given the discontent surrounding the scrapping of the winter fuel payment, citing a 2/5 chance of Reeves pursuing this route.
He also said there was a 2/5 likelihood of the government reducing tax-free cash. The lump sum allowance limits the amount of tax free payments that can be paid during an individual’s lifetime to £268,275. According to Broadstone, it is estimated that reducing the lump sum allowance would impact one in five retirees and could cause a drop in confidence around pensions as a savings method.
Brooks also deemed it unlikely that Labour would reform the national insurance system, including changing the NI break on pension contributions for employers, charging NI on pension incomes or charging NI on earned income over State Pension.
He said: “Given the flexible nature of the percentages and bands used there are a wide range of outcomes available. IFS estimates a complete change to NI on pension contributions could raise £17 billion. This passes the tax burden on to employers. Applying NI to pension income also seems hard to implement as people would be paying NI twice.”
Brooks said the likelihood of Labour implementing this change would be 1/5.
Similarly, Brooks said increases to mandatory auto enrolment contributions would also be unlikely. While mandating larger contributions from employees and employers is seen as key to ensuring that people build up adequate pension savings, Brooks said any changes to auto enrolment are likely to be contained within the second phase of the pensions review focused on adequacy. He rated the likelihood of changes in the autumn budget next month as 1/5.
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