Seven pension changes that could come in the autumn Budget --[Reported by Umva mag]

THE Labour government will deliver its first budget on Wednesday, October 30.

Prime Minister, Keir Starmer has already warned that the Autumn Statement will be “painful”, leading to widespread speculation around what changes lie ahead.

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Experts say that pensions might be a key target for Rachel Reeves at the speech – which is being called a Budget, as it is the party’s first fiscal speech since the election – particularly since the Chancellor spoke about a £22billion black hole in the UK’s finances.

Already, pensions companies are seeing people withdraw money from pensions, amidst concerns that the government will change the goalposts.

However, financial commentators are warning people not to make rash decisions now, as it could significantly impact your financial future.

Michael Summersgill, chief executive at finance firm AJ Bell, said: “Constant rumour and speculation about the future of retirement tax incentives are hugely damaging.

“People are taking financial decisions in part based on pre-Budget speculation and it chips away at people’s confidence in pensions generally.

“Almost 100% of advisers we surveyed said they’ve dealt with tax and pension queries from clients concerned about the Budget, with a third saying they had seen an increase in clients wanting to take tax-free cash in anticipation of a pensions tax raid in the Budget.”

Shane Julian, managing director and financial planner at Brancaster House Financial Planning added: “Our advice to consumers ahead of the Autumn Budget is to not get caught up in speculation… It’s important to stay calm and avoid knee-jerk reactions to potential changes in pension policies.”

That said, people should be keeping a close eye on the budget, to understand what’s been announced and how it could impact your finances.

Some of the changes that are expected could change your retirement plans, so it’s important to reassess once we know what’s been announced.

To help you understand what to keep an eye out for, The Sun has spoken to several experts in the pensions industry and asked for their key predictions for what pensions changes might be on the chancellor’s hit list.

State pension increases

Not strictly a Budget announcement, but the government is expected to confirm how much the state pension will rise by from next April.

The Labour government has committed to the triple-lock, which says that state pensions will rise by the higher of earnings rises, inflation, or 2.5%.

Last month’s earnings figures showed average growth of 4%, so this is the increase that is most widely expected.

The final decision is typically made by the Work and Pension Secretary, usually around the time of the budget.

Some commentators have also said that the chancellor might reconfirm Labour’s commitment to the triple-lock in the Budget.

One important thing to look at out for is income tax band freezes. Currently, people who only receive the state pension do not pay any income tax because it falls under the 20% tax threshold.

However, thresholds are currently expected to stay frozen until 2028.

Even if the state pension only rises by the minimum possible of 2.5% under the triple-lock, this will push some of the poorest pensioners into paying income tax before the freeze lifts.

Changes to the state pension age

The current state pension age is 66, but there are already plans in place to increase this to 67 in the years 2026-28 and then 68 from 2044-46.

The second increase impacts anyone who was born after 1977.

There is another review of the state pension age planned for this parliament, which will make recommendations about whether the SPA should change, and if so when this will happen.

The response isn’t expected until next year, so we’re unlikely to hear anything about it in this Autumn Statement, although it could be mentioned.

Cuts to tax-free pensions cash

One of the most commonly predicted changes for this year’s budget is the rules around tax-free cash.

Under the current system, retirees can access 25% of their pensions saving tax-free, up to a limit of £268,275.

However, there are rumours that the government might reduce the percentage that can be taken tax-free or reduce the cap on the maximum amount.

Calum Cooper, head of pensions policy innovation at Hymans Robertson, cautions that any changes could directly affect people’s broader financial plans. For example, people planning on using the tax-free cash to pay off their mortgages might not be able to do so.

Generally, experts are concerned about the impact that changes to the rules would have on pension saving.

For instance, Brancaster House’s Mr Julian said: “Taking away these incentives could discourage saving and ultimately increase pressure on the State’s welfare system in the future.” 

He adds that the IMF has proposed a flat amount of £100,000 rather than a change to the overall percentage.

He said: “This could be an ‘easier’ option for Labour, but I would hope if such a change is implemented, this would be on an age basis.”

Broadstone’s head of policy, David Brooks, says that estimations show that changing the limit to £100,000 would impact one in five retirees and raise around £2bn a year in the long run. 

Clare Moffat, pensions expert at Royal London urges people not to panic, and says that typically these changes are introduced slowly. She adds that it’s important that people seek advice or guidance before removing any money from their pensions.

She said: “In the past, changes to rules have not been brought in overnight, giving people notice of the change and giving those who were entitled to a higher amount the opportunity to access that higher amount when they want to. 

“Taking money out of a tax efficient environment isn’t something to be done on a whim. And if you have a large amount in a pension, taking out all of your tax-free cash means that it could be sitting in your bank account.

” If the worst were to happen and you died, that could mean that inheritance tax would be payable. Currently if money is in your pension pot and you died then it wouldn’t normally be subject to inheritance tax.”

Mr Summersgill added: “Even the perception that government might renege on the terms of the deal risks people taking actions which may not be in their best interest.

“Rumours about the future of tax-free cash, one of the best understood and most valued benefits of pensions, are particularly problematic.

“Taking your tax-free cash is an irreversible decision and, assuming the chancellor doesn’t pursue a disastrous raid on tax-free cash, those people may find they’re in a worse financial position long-term.”

Reducing the annual allowance or reintroducing a lifetime allowance 

Independent financial adviser company Edale says we could see changes to the annual allowance.

This is the maximum amount of tax-relieved contributions that can be made to a pension each year and currently sits at £60,000.

It says that the government could reduce the annual allowance further, perhaps back to £40,000 or lower. 

Another target could be the carry-forward rule, which allows individuals to use any unused annual allowance from the previous three tax years, provided they were members of a pension scheme at the time.

Edale said: “The government could reduce the number of years from which unused allowances can be carried forward (e.g., reducing it from three years to one year). Alternatively, they could cap the total amount that can be carried forward.”

Labour could also look to reintroduce the Lifetime Allowance (LTA) which is the maximum amount you can accumulate in your pension pots without incurring extra tax charges. 

It had previously pledged to do this, then said it would create an exemption for some public sector workers.

This promise was then reversed, before Labour quietly removed the pledge to reintroduce the LTA from its election manifesto.

But experts have warned that this doesn’t mean it won’t be reintroduced at a later date.

Introducing flat-rate tax relief

One rumour that does the rounds every time the budget happens is changes to the way that pensions tax relief works.

Under the current system, the tax relief you get on your pension contributions is determined by your marginal rate of income tax. Basic rate taxpayers (and those who earn under the tax threshold) get 20%, higher rate tax payers get 40% and additional rate taxpayers get 45% .

But moving to a flat-rate pension tax relief system, often predicted to be around 30%, reduces the relief available to higher earners, lowering the overall cost to the government.

Mr Brooks said: “This is the main rumour doing the rounds and would have the biggest impact on people saving for a pension but is likely to be the hardest. 

“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.”

Rules around inheritance tax and pensions

Another hotly tipped change is around the way that pensions and inheritance tax interact.

Under the current rules, money held in a defined contribution pension does not form part of your estate and can be passed on inheritance tax free. If you die before age 75, the money might also be income tax free. 

However, this could all be about to change.

Tom McPhail, director of public affairs at the Lang Cat said: “Top of my list of expected changes is the introduction of some form of death tax on unused DC pots (probably with an interspousal exemption). 

“It would nudge savers back towards choosing more guaranteed incomes, so reversing some of the effects of the 2015 pension freedoms.

“It would also close off an anomaly whereby tax relief funded savings are allowed to grow tax free and then pass on to the next generation without paying any inheritance tax.”

Mr Brooks added: “Changing one or both of these rules would be a relatively easy move and potentially lucrative. This 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.

Brancaster House Financial Planning’s Julian agrees that as pensions are usually held in Trusts, this would require significant legal changes. He said: “It’s not something that would happen overnight, but it’s an area worth watching as it could have big implications for pension savers.”

Changes to national insurance and pensions

Under the current rules employer contributions to pensions are exempt from National Insurance Contributions (NICs) and are tax-deductible. 

However, Edale says that one potential option is that the government could introduce NICs on employer contributions or limit the tax deductibility of these contributions.

Ultimately, this could reduce the cost of pension tax relief to the government. In fact, IFS calculations show that applying employer NI to employer contributions to a pension would raise huge amounts – £17bn a year – for the Treasury.

However, Fidelity warns this could also reduce the amounts being saved into pensions by at least the same amount if employers pass on the cost to their workers.

The Lang Cat’s Mr McPhail said: “I think it likely the Chancellor will reduce or withdraw the NI relief currently granted on employer pension contributions. 

“This has the superficial appeal of being low hanging fruit; it can generate lots of money for the Chancellor to spend and it won’t have any immediate effect on people’s household finances. 

“However, in the long term, like Gordon Brown’s ACT raid in 1997, it would undoubtedly reduce the amount of money going into people’s pensions and so would lead to poorer retirements for millions.”

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