Pensions:
“Pretty much every major spending event over the past decade has been preceded by rumour and speculation about the future of higher-rate pension tax relief. However, removing higher-rate relief would be a direct attack on middle Britain. It is also far from clear how a flat rate of pension tax relief would be applied to defined benefit (DB) schemes, where contributions come from pre-tax ‘net pay’. Any solution would inevitably see members of public sector DB schemes landed with significant tax bills as well.
“While strained public finances demand the Chancellor reviews all areas of public spending, a dramatic pension tax relief raid would come with huge practical challenges and political risks. There are however, easier ways for the Chancellor to reduce the cost of pension tax relief.”
Annual or lifetime allowance cut:
“If the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull. The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances. Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions. The lifetime allowance could also potentially be reduced, although given it has already been frozen for the rest of this Parliament at just over £1 million this seems unlikely.
Restrict pension tax-free cash:
“Another rumour that often does the rounds is that the Treasury is planning to either remove or restrict the ability of savers to take a quarter of their retirement pot tax-free. While the Treasury has seriously explored radical tax relief reform, it is telling that tax-free cash has never been looked at in the same way.
“This is likely in part because any move to cap or abolish tax-free cash altogether would be extremely unpopular, and in part because it would almost certainly involve creating a protection regime, so pension contributions already made continue to benefit from their existing tax-free cash entitlement. This would deliver an unwelcome double for the Chancellor of unpopularity and complexity. What’s more, any savings to the Exchequer would potentially take years to materialise.”
‘Death taxes’:
“If the Chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death. Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75. Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not. If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them.
“Inheritance tax is the other lever the Treasury could pull, either by increasing the current 40% rate or lowering the amount that can be inherited tax-free. Both measures would inevitably lead to ‘death tax’ headlines, however – not something politicians generally welcome.”
