Reports detailing the extent of the government’s spending have been rife since the outbreak of the pandemic. The BBC reported in June that Covid borrowing from April 2020 to 2021 had reached £299 billion, with £200 billion expected to be borrowed during the 2021/22 tax year.
While the chancellor’s spring budget included freezes to the Lifetime Allowance, the Capital Gains Tax allowance, and the Inheritance Tax nil-rate band, further cuts may be needed to rebalance the public purse.
Recent reports suggest that pensions could be an area the chancellor looks to target, and these potential changes could have implications for your retirement plans.
Here’s a look at four tax changes that could be in the offing.
1. A single rate of pension tax relief
Pension tax relief incentivises pension saving by topping up the contributions you make.
Under current rules, every ÂŁ1 you contribute costs you just 80p, with the rest coming from the government.
For those paying higher- and additional-rate tax, the basic-rate of relief remains the same, but you can also claim an additional 20% or 25%, respectively, through your self-assessment.
This system is seen by some as providing additional support for the wealthy. The chancellor is reported to be considering a change.
Introducing a flat rate of tax relief, at 30% for example, would be good news for basic-rate taxpayers but less so for those paying the higher or additional rate.
If you think you might be affected by this change you might consider making the most of the current rules by maximising your pension contributions before any announcement is made.
2. Tax on employer contributions
Of all the potential changes, arguably the least likely to make its way from rumour to implementation is a tax on employer pension contributions.
Although it has been spoken about for some time, the change would be harder to implement than some of the other rumoured changes.
According to the Personal Finance Society, the tax benefits of extracting profits via an employer pension contribution can be significant. For this reason, small, limited companies might consider making the most of the current system while it remains in place.
3. A reduction to the Lifetime Allowance (LTA)
At its peak, the LTA stood at ÂŁ1.8 million. At that point, you could hold total pension funds worth up to this amount and withdraw them without becoming liable for an LTA charge.
It was first introduced in 2006 and reached its peak between 2010 and 2012, before rapidly declining.
Back in April 2021, it had been expected to rise in line with the Consumer Price Index (CPI). Instead, the chancellor used his budget to freeze the LTA at its current amount of ÂŁ1,073,100 until at least 2026.
This is already expected to raise nearly ÂŁ1 billion for the Treasury, both through charges and through a reduction in tax relief as those pension savers close to the limit cease contributing.
Charges for exceeding the LTA in the 2021/22 tax year are 55% for any excess pension funds accessed as tax-free cash and 25% for funds taken as income.
A further reduction in the LTA, to ÂŁ800,000 or ÂŁ900,000 would see the LTA drop to ÂŁ1 million below its peak and the lowest level since its inception.
The move would trap many pension savers while bringing in a large amount of extra revenue for the government. Even a pension pot valued at £1 million could be expected to provide an annual pension – after tax-free cash – of only around £28,000.
It could force pension savers to look elsewhere, such as to Stocks and Shares ISAs to provide some of their income in retirement.
4. Scrapping the State Pension triple lock
The most widely discussed change, and one that could be imminent is the scrapping, or at least the suspension, of the State Pension triple lock. This Conservative manifesto promise has been under pressure for some time, but the coronavirus pandemic could provide the perfect time for making a change.
The triple lock ensures that the State Pension rises each year in line with the highest of these measures:
- 2.5%
- Average wage growth
- Annual inflation
Recent figures show that after a dreadful year for many employment sectors – with business closures and millions of UK workers furloughed on 80% pay – average wage growth could top 8%.
The cost of this to the government is calculated at around ÂŁ3 billion higher than they would have anticipated spending.
Such a large rise for pensioners, while the economy is still recovering, might make the government’s reneging on a manifesto promise easier for voters to swallow.
Get in touch
At HDA, the long-term retirement plan we put in place for you will be aligned with your dream retirement. Be assured that if your aspirations haven’t changed, it’s unlikely your financial plan will need to either.
If you’d like to discuss how our decades of experience in pension planning can provide you with your dream retirement, please get in touch. Email enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
