Govt spending review must not discourage retirement saving - Aegon

It is vital that changes included in the government’s spending review do not “discourage saving for retirement or ‘rainy day’ emergencies”, Aegon pensions director, Steven Cameron, has warned.

The spending review, which is due to be outlined by Chancellor Rishi Sunak on Wednesday 25 November, could include changes to pensions tax relief, income tax, national insurance and state pensions as the government seeks to deal with the impact of the Covid-19 pandemic.

Sunak has said that taxpayers "will not see austerity" in the changes made this week but has cautioned that people will see "economic shock laid bare".

Cameron commented: “The tax system can have a big impact on long term saving and investment behaviour and can go a long way to nudging individuals into actions the Government wants to encourage.

"So it’s vital any changes to tax reliefs and incentives don’t discourage saving for retirement or for ‘rainy day’ emergencies - if anything these should be encouraged to provide investments in the economy.

“With many seeing change as inevitable, for those lucky enough to have any extra funds, now may be the time to make as much use as they can of incentives they may lose by topping up pension contributions or making full use of ISA allowances.”

Looking towards potential changes to pensions tax relief, Cameron mused that there has been speculation that various Chancellors could change the system in order to increase tax receipts “for years”, with current rumours indicating that Sunak might back a move to “a flat rate of relief at 25 per cent”.

Cameron said: “While this would reduce the incentives for higher rate tax payers, it would actually improve the boost basic rate taxpayers receive.

"But as previous Chancellors have discovered, such changes are highly complex to implement, particularly for defined benefit schemes or for those using ‘salary sacrifice’ to pay their pension contributions.

“This means individuals and pension schemes would need sufficient time to adapt.”

He added that this could clash with the government’s plans to focus on pension funds “as a source of investment to support economic recovery, including in infrastructure and the ‘green revolution’”.

Although he commented that “a balanced approach that offers greater incentives to basic rate taxpayers to put more into their pension could not only boost pension funds but also help more people save adequately for retirement”.

Capital gains tax rates could also be doubled and various exemptions from the tax may be binned after a report from The Office for Tax Simplification found that these measures could raise £14bn.

Cameron stated: “These changes would affect a wide variety of individuals including those holding significant investments outside of tax favoured wrappers such as pensions and ISAs, owners of second properties and business owners who plan to sell their businesses to fund their retirement.”

The state pension could also be set for a change after industry figures warned that keeping the triple lock, which ensures that state pensions rises each year by whichever is higher out of inflation, earnings growth and 2.5 per cent, will rise sharply due to the impact of the Covid-19 pandemic.

However, Cameron stated that the government “appears to have committed to keep this at least until next April, upholding its pre-election manifesto commitment”, despite the “heated debate”.

He continued: “But with earnings growth likely to be highly volatile for the foreseeable future, and with the prospect of a public sector pay freeze, this could prove just too costly in future years, with every 1 per cent increase adding £1bn to the ‘pay as you go’ bill met by earners below state pension age in every future year.”

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