AJ Bell has responded to reports that pension tax-free cash will remain unchanged and that the Government is considering measures linked to the State Pension and personal allowance.
AJ Bell has welcomed reports that Chancellor John Healey will leave pension tax-free cash entitlements unchanged in this week’s Budget, while highlighting questions around proposals linked to State Pension taxation.
According to reports, pension savers will continue to be able to access 25% of their pension tax-free, subject to the current maximum of £268,275.
Tom Selby, director of public policy at AJ Bell, said: “There has been mercifully little speculation about the future of pensions taxation ahead of this year’s Budget, despite the challenging economic environment the chancellor is operating in.”
He added that the absence of widespread speculation had helped avoid a repeat of the rush to access tax-free cash seen previously.
“Reports over the weekend that Healey doesn’t plan to touch tax-free cash entitlements in this Budget are welcome, but he has an opportunity to go further by locking in long-term stability for pension savers.”
Selby said a commitment not to alter pension tax relief or tax-free cash rules would give savers greater certainty when planning for retirement.
The comments come as reports also suggest the Government will confirm a 3.9% increase in the State Pension in line with earnings growth.
Selby said: “Reports of a 3.9% state pension increase in line with wages will be a vital boost for pensioners worried about rising costs in 2027, but pushing it over the frozen personal allowance was always going to raise difficult questions.”
The full new State Pension is expected to move above the frozen personal allowance, prompting discussion about how pensioners whose sole income is the State Pension will be treated.
“Last year the government confirmed that once the state pension clears the frozen personal allowance, pensioners whose sole income is the state pension would not be faced with the administrative hassle of simple assessment tax returns. However, we have been waiting ever since for detail of how this policy will work, and how any tax will be collected.”
Selby noted reports that the Government could address the issue through a personal allowance linked to the State Pension for lower-income pensioners, but said details remain limited.
“It has been reported that government intends to tackle the problem with a personal allowance to match the state pension for low-income pensioners – which will then rise in sync with the state pension for a period.”
He added that the way any changes are implemented will be important.
“If the proposal means people who only have state pension income benefit while those who have saved privately don’t, those who have saved could understandably argue their diligent behaviour has effectively been punished.”
Selby also said: “Equally, if a higher personal allowance is handed to all those above state pension age regardless of the income source, a two-tier income tax system explicitly favouring older people will have been created.”
Main image: pensioners-age-cymru-hqq2aIEURNA-unsplash
