Govt mulling pension tax raid to fund pandemic response

The government is reportedly planning to target pensions in order to help pay for its response to the Covid-19 pandemic, with the introduction of flat-rate tax relief believed to be under consideration.

A report from The Telegraph stated that measures being pondered by the Treasury included lowering the lifetime allowance, introducing a flat rate of tax relief or taxing employer contributions, although the triple lock on state pensions is not believed to be under threat.

The lifetime allowance was already frozen in the Spring Budget, but the report suggested that it could soon be slashed from £1,073,100 to as low as £800,000, leading many more savers to fall afoul of the limit.

DeVere Group founder, Nigel Green, said the measures would be “a slap in the face for those who have worked hard and saved hard” and pointed out that a lot of savers could need to “assess if future contributions and investment growth could drag them into a position in which they’ll be above the threshold”.

Aegon pensions director, Steven Cameron, said further changes to the lifetime allowance would likely be “particularly punitive” as it has already been frozen, adding that the current allowance’s limits hardly afforded savers “a life of luxury”.

Examining the other targets, he argued that cutting savings incentives for higher earners by fiddling with tax relief while boosting the state pension “could end up stoking intergenerational tensions and does raise questions about fairness”.

Cameron continued: “On the broader point about tax relief, we aren’t against the principle of a flat rate, but any reform would need to be carefully thought through and also balanced against intergenerational considerations. There are broader challenges to reform of tax relief, as they would be highly complex to implement, particularly for defined benefit schemes.”

As recently as the beginning of June, the government had stated that significant changes to pension tax relief would require “careful consideration” and added that its immediate focus was on supporting businesses and workers in Covid-19 recovery.

AJ Bell senior analyst, Tom Selby, commented: “Introducing a flat-rate of pension tax relief, an idea often touted by think-tanks, would present genuine practical challenges and would likely result in tax rises for public sector workers in defined benefit schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic.

“The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the government increased their pension costs just as many attempt to recover from a nightmare year.

“More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, inadequate retirement saving remains one of the most significant long-term challenges.”

However, a senior government official told The Telegraph that Westminster’s job was to “keep people out of poverty, not to enrich the middle classes”.

Either way, the proposed changes could have a major impact on the pensions industry, with the effect of such a severe cut to the lifetime allowance being exemplified by Quilter’s urging for advisers to consider the impact of a mere freeze on their clients’ pensions back in April.

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