Pensions expert Andrew Megson outlines some of the discussions on potential Budget implications for pensions.
After an incredibly difficult year and in the wake of Covid-19, the Government will this week announce its spending plan for the year ahead.
And given that the Chancellor has introduced a series of vital measures to help businesses and households survive the previous 12 months, Mr Sunak now faces the difficult task of footing the bill.
And the bill is costly. Funding measures such as the furlough scheme, as well as Coronavirus Business Interruption and business bounce-back loans, caused Government borrowing to leap to £270.6 billion from the period between April 2020 and February 2021 alone.
This has been money well spent. However, when it comes to repaying the debt, concerns have been rife that pensioners may bear the brunt. In recent weeks, rumours have been widespread about the affordability of certain policies such as tax relief and the triple lock – incentives which, for all intents and purposes, allow many individuals to enjoy a financially secure retirement.
Until the Budget announcement on 3 rd March, these rumours will remain purely speculative. But if true, they could cause a great deal of damage to the retirement strategies of individuals all over the UK. As such, I have pinpointed some potential areas for change that savers should keep abreast of ahead of the Chancellor’s Spring Budget.
One of the most prominent rumours milling about is that the Chancellor will use the Budget to announce a new “stealth” tax on the UK’s wealthiest pensioners.
The lifetime allowance is the amount of cash an individual can save into their pension pot throughout their lifetime, before they begin to incur tax charges. Currently, the allowance is £1,073,100. However, it is rumoured that the Chancellor is considering freezing the limit at this amount throughout the rest of parliament.
A freeze would mean that more people – most notably higher earners who are saving for retirement, people who started saving hard early on and whose investments have performed well – risk being dragged over the savings threshold. Consequently, they could face a 25% levy on any additional income from their pension pot. What’s more, this will rise to 55% if pensioners decide to draw down a lump sum.
This change would undoubtedly help the Government to begin repaying debt; it would lead to approximately 10,000 people with larger pensions paying more than £22,000 extra in tax by 2024. Indeed, analysis suggested that this move could earn the Treasury £250 million a year.
Of course, this is not the first time the. Lifetime allowance has been cut. Since 2011, the allowance has been gradually cut down from £1.8 million; this potential freeze, will likely exacerbate savers, who have carefully planned their strategies years in advance.
I sincerely hope that the Chancellor thinks long and hard before committing to freezing the lifetime allowance. It would unfairly penalise savers, essentially jeopardising their financial futures.
Likewise, changes to pension tax relief for high earners had been touted for the Budget later this week – and as this incentive is one of the most effective at enabling savers to prepare for retirement, this had been the cause of some contention.
Usually, when a saver contributes to their pension scheme, any money that would have gone to the Government as income tax is instead saved into their pension pot. This relief is paid at the highest rate of income tax a saver pays; this means that a basic rate taxpayer will receive 20% in tax relief. Meanwhile, higher and additional rate taxpayers receive 40% and 45% respectively.
The Chancellor is said to be considering making changes to the tax relief system, for example, radically cutting the Government pension so all savers only get the 20% basic rate.
Mr Sunak is also contemplating reducing the annual contribution limit – the maximum amount one can save into a pension each year and still receive tax relief – down from £40,0000. Indeed, analysis has shown that the Government could make billions in savings should they decide to go ahead with such cuts.
It is likely that plans to cut pensions tax relief for high earners are now likely to be shelved until later this year. But the looming prospect of potentially severe changes to pension tax relief will do little to calm the nerves of savers.
After all, many savers build their retirement strategies around the assumption of receiving pension tax relief. They could therefore find themselves out of pocket if changes to the system are introduced. Likewise, it could also deter younger savers from saving for retirement as early as possible. I therefore urge the Chancellor to proceed with caution if this is something he plans to revisit.
Households are currently experiencing a great deal of financial anxiety and incentives like the state pension often act as a vital lifeline to those who have reached state pension age. As such, rumours that the Chancellor could make changes to the triple lock policy will be of great concern.
Introduced in 2010 by the Conservative-Liberal Democrat coalition Government, the triple lock policy guarantees that state pension payments rise by 2.5% each year in line with the rate of inflation. While a costly policy, the triple lock is able to safeguard the nation’s most vulnerable pensioners from pension poverty. Indeed, recent research from the Pension Policy Institute has found that three in every four pounds of the poorest pensioners’ income comes from the state pension.
In light of this, I sincerely hope that the Chancellor elects to leave the triple lock unchanged when he announces his budget – or the very least, offers a viable alternative. Although the Government could save up to £14 billion by 2023 according to modelling, should the policy be culled entirely, it would risk driving thousands of retirees into pension poverty.
Although the UK Government is taking slow and measured steps to ease the lockdown, the economic climate remains volatile. As such, the upcoming budget will be a source of anxiety for many savers. I hope that the Chancellor avoids making any drastic changes to pension policy without providing adequate warnings so that Britons can adjust their retirement strategies accordingly. In times like these, the Government should be ramping up its provisions to protect savers so that they can enjoy a stress-free and financially secure retirement.
Andrew Megson is the Executive Chairman of My Pension Expert, an Advised Retirement Income Specialist. Founded in 2010, My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week.