Savings experts are urging Chancellor Jeremy Hunt to resist the urge to slash pension incentives in Thursday’s autumn statement. They say these tax breaks are needed more than ever now.
Britons doing the right thing by setting money aside for the future need encouragement, not yet another a Treasury tax raid.
Yet there have been constant rumours that Hunt and Prime Minister Rishi Sunak will target the nation’s pensions tomorrow.
HM Treasury has been scouring our workplace and personal pension savings to see how it could use them to generate extra cash.
The pensions lifetime allowance, which imposes a punitive 55 percent tax larger pension pots, looks almost certain to become even more punitive.
This limits the total amount people can save in workplace and personal pensions, and has been cut from £1.8 million to just over £1 million today.
It has been frozen at that level until 2026, now Hunt looks almost certain to extend the freeze for an additional two years.
This tax will only hit the better off but more than two million will be caught including long-serving NHS doctors.
Tom Selby, head of retirement policy at AJ Bell, said the pensions lifetime allowance has been the subject of repeated attacks by successive Chancellors over the last decade, putting a “cap on aspiration”. “It punishes people who enjoy strong investment performance, effectively acting as a disincentive.”
Selby also warned that Hunt could even start charging inheritance tax on unused pension pots.
“Currently, if you die before age 75, you can pass on funds IHT-free. If you die later, your beneficiaries will pay income tax on any withdrawals.”
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Charging IHT on pensions would be “deeply unpopular”, Selby added. “It would leave many feeling the Chancellor has pulled the rug from under their inheritance plans.”
We may escape a “pensions death tax” for now, but that option will no doubt remain on the table.
Hunt is also thought to be considering cutting tax relief on pension contributions for higher-rate taxpayers from today’s 40 percent, warned Raj Mody, global head of pensions at PwC. “This might be cut to a flat rate for everyone, say 30 percent or even 20 percent.”
This could save the Treasury £10billion a year but Tom Evennett, UK&I family enterprise leader at EY, warned: “It may deter high earners from paying into pension pots.”
Hunt could even scrap the popoular 25 percent tax-free pension lump sum, in a move that would “attract the ire of pensioners”, Evennett warned.
Aegon pensions director Steven Cameron says Hunt faces a “particularly challenging budget” as he battles to put the UK’s finances on a sound footing. “But millions of savers need to know their personal retirement plans are on a sound footing, too.”
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Cameron added: “We urge care in rushing into complex reforms today, which could have damaging consequences longer term such as putting people off saving.”
Savers need more incentives to save than ever, as the cost of living crisis hammers incomes, Cameron added.
Yet he warned a tax raid could backfire as savers who contribute to private and workplace pensions are reducing their reliance on the state to fund their retirement. They could end up claim more state benefits to make up the shortfall.
If Hunt does raid pensions he will continue an ignoble tradition dating back to 1997, when former Labour Chancellor Gordon Brown scrapped tax relief on pension firms’ dividends.
That had cost savers a staggering £118billion by 2014 and the total will be even greater today.
That moved also sounded the death knell for gold-plated workplace final salary pensions, by making them more expensive to run.
Now Hunt could wreak similar havoc, punishing Britons who did exactly what the Government had told them to do.
Many will feel they were saving for the Treasury’s benefit, rather than their own.