In today’s much-anticipated speech to the Labour Party conference by Chancellor Rachel Reeves, it is clear that she is refusing to U-turn on the decision to means-test the Winter Fuel Payment in the face of mounting pressure from consumer groups and some Labour MPs. Reeves continues to insist the move is necessary to help deal with the £22 billion “black hole” she says Labour has inherited from the previous government.
However, she has attempted to strike a more positive tone on the UK economy in the speech, saying there will be “no return to austerity” and the Budget will have “real ambition”. However, there remains huge uncertainty about where the axe will fall at the 30 October Budget, with rumours swirling about possible reforms to pension tax relief, pensions tax-free cash and Capital Gains Tax (CGT).
Tom Selby, director of public policy at AJ Bell, has been sharing his analysis with us below, into some of the key parts of today’s speech by the Chancellor as well as looking ahead to her first Budget on 30th October saying:
“Chancellor Rachel Reeves was clearly intent on striking a more positive tone in her big conference speech after months of doom and gloom about the state of the UK’s finances. She insisted the government would not return to austerity and that public spending will increase in real terms during this Parliament despite the challenging fiscal environment currently facing the Treasury.
“However, Reeves continues to stand firm on Labour’s controversial decision to means-test the Winter Fuel Payment despite widespread concerns about the impact on pensioners who just miss the cut-off and fears that hundreds of thousands of retirees who should be entitled to the payment will not receive it because they fail to make a claim.
“The government has attempted to deal with this through a Pension Credit awareness drive, but turning the tide in the space of a few months on what has historically been a chronically underclaimed benefit is a massive, possibly insurmountable, challenge.
“While the chancellor’s tone may have been more positive today, she left the conference in no doubt that painful decisions are coming in the Budget on 30 October – although the country remains in the dark on where exactly the axe will fall. Like nature, politics abhors a vacuum, and the lack of clarity has led to inevitable speculation about possible revenue-raising reforms to pension tax relief and tax-free cash, as well as Capital Gains Tax (CGT).
“The fact the government has boxed itself in by ruling out increases to the rates of income tax, National Insurance (NI) and VAT; insisting it will not raise taxes on ‘working people’; and saying its key economic priorities are growth and wealth creation further confuses the picture. It is hard to see how the chancellor can raise the money she says she needs without undermining at least one of these pledges.”
Pension tax reform – no easy options for the chancellor
“Pretty much every major fiscal event over the last two decades has been preceded by feverish speculation that the axe could fall on pension tax perks. There are a number of potential options open to the government, but all come with significant practical and political challenges.
“Most controversially, there has been speculation government could move to restrict people’s entitlement to tax-free cash when they access their retirement pot. Currently, most people can take up to 25% of their fund from age 55 tax-free, with this minimum access age due to rise to 57 in 2028. The amount of tax-free cash most savers can take over their lifetime is capped at £268,275. Reeves could, in theory, lower the amount of tax-free cash Brits are entitled to – or even abolish the entitlement altogether.
“However, this would be deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing, including in UK Plc. It would also inevitably be hugely complicated, as those who have already built-up entitlements to tax-free cash under the existing rules would almost certainly need to be protected against a retrospective retirement tax. Furthermore, the overall amount people can access tax-free has already been scaled back significantly over the last 14 years, and if the current figure remains frozen, it will continue to be eroded in real terms.”
Pension tax relief and levying NI on employer contributions
“The most common pre-Budget pension tax relief speculation centres around the future of higher-rate pension relief and the potential to introduce a flat rate of pension tax relief. At the more extreme end, this measure could see pension tax relief restricted to the basic rate of 20% for all, with advocates suggesting this could raise billions of pounds of extra revenue for the Treasury.
“As with most radical pension tax changes, introducing a flat rate of relief is much easier said than done. A huge chunk of any potential savings to the Treasury from a pension tax relief raid would come from defined benefit (DB) schemes, the majority of which now reside in the public sector.
“If a flat rate of pension tax relief below 40% were applied on these schemes, the only way to ensure the correct level of tax relief was applied to contributions from higher and additional-rate taxpayers would be to hit those members with a tax charge likely running into thousands of pounds. This would therefore risk opening up a blistering row with NHS staff and civil servants at a time when many public services are already stretched to breaking point.
“A potentially more straightforward alternative would be to levy NI on employer pension contributions, a reform which could raise up to £14 billion for the Exchequer. However, the government will be conscious of the risk such a move would pose, loading extra costs on the businesses it hopes will drive long-term economic growth and potentially undermining wider efforts to boost retirement saving.”
A new pensions death tax?
“The tax treatment of pensions on death will be viewed by many as low hanging tax fruit ready to be picked. Under existing rules, it is possible to pass on your retirement pot completely tax-free to your nominated beneficiaries if you die before age 75. If you die after age 75, any inherited pension is taxed in the same way as income. Crucially, pensions usually don’t form part of people’s estate for inheritance tax (IHT) purposes.
“This is undoubtedly a generous set of rules and something which could easily be reviewed by the new government. However, as is often the case with pensions, applying any new tax on death – or bringing pensions into the IHT net – would come with substantial challenges.
“The biggest of those would be around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today. There will, for example, be lots of people who chose to transfer defined benefit pensions into a defined contribution scheme in part because they wanted to prioritise passing money on tax efficiently to loved ones. If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug has been pulled from under them. It is therefore possible a complicated protection regime would be needed to ensure people are not subject to unfair and arguably retrospective tax measures. This would inevitably reduce the money the Treasury could potentially raise from such a move.
“Given the government’s focus on stability, it would be positive if the chancellor used her Budget to commit to ending the constant speculation and providing long-term certainty around pension tax incentives. Savers are making a long-term commitment when saving in a pension, so a commitment to stability from the government doesn’t feel like too much to ask.”
ISA simplification and Lifetime ISA improvements – an opportunity for Reeves to deliver some positivity at the Budget
“ISA simplification should be a priority for this government, with a focus on combining Cash and Stocks and Shares ISAs. Reform along these lines would come at limited cost to the Exchequer and should help encourage millions of people to invest for the long term, including in UK Plc. Moreover, it would allow the chancellor to deliver some positive news at little cost to the Exchequer.
“Steps could also be taken to improve the attractiveness of the existing Lifetime ISA. Helping people onto the housing ladder is a clear priority for the new government and the chancellor should iron out the kinks in the design of the Lifetime ISA to make it as attractive as possible to would-be homebuyers.
“Most obviously, the 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes those for whom a change of circumstances means they can’t pursue their homeownership aspirations. Reducing this to 20%, so it simply aims to return the upfront government bonus, would be a simple, low-cost reform that benefits younger people.
“Government should also consider increasing the minimum property purchase price, which currently stands at £450,000, to reflect house price inflation since the LISA was introduced seven years ago.”
