Long read: Speculation over pension tax changes persists ahead of spring Budget

Speculation over potential changes to pension taxation have persisted ahead of the spring Budget next week (15 March), with industry experts predicting a greater focus on pension allowances rather than pension tax relief.

"It wouldn’t be a Budget if there weren’t some speculation around the future of the pension tax system”, Standard Life managing director for customer, Dean Butler, stated ahead of the Budget, noting that there has been a number of reports calling for an overhaul of the current tax rules.

Despite suggestions to, for instance, limit the value tax free cash that can be taken, Butler suggested that it would be "surprising" if the government deemed reform a priority at the moment given the complexities involved in making changes.

"There’s also the risk that any change is viewed as further tinkering in a system where people want certainty around the rules and the outcomes they can expect at retirement," he stated.

Indeed, Evelyn Partners managing director, Jason Hollands, said that much of the speculation ahead of the Budget has focused on pension allowances rather than tax relief, suggesting that "it looks very unlikely that Hunt would raise allowances with one hand and cut tax relief with the other".

"It would also be unpractical to be able to implement such changes so close to the new tax year, as well as politically risky for Hunt to target the tax benefits of private pensions after the significant tax crunch announced at the Autumn Statement, and on top of the likely acceleration of state pension age increases," he stated.

"Pension tax reliefs for higher and additional rate taxpayers – the proverbial cat with nine lives – look set to survive for now but their long-term survival should not be taken for granted."

Scottish Widows head of policy, Pete Glancy, also argued that the government should "seize the opportunity to reform the counter-productive series of tax allowances, if they are serious about incentivising older professionals to return to work".

In particular, the pensions lifetime allowance (LTA) has been a key focus ahead of the Budget, with Butler pointing out that this is another factor often cited as discouraging some older people from continuing to work, particularly NHS doctors.

Butler also argued that the LTA "really isn’t fit for purpose as an increasing number of people will reach the limit and change is needed to ensure that those who do the right thing and save for their retirement aren’t unduly penalised".

Adding to this, Isio director, Iain McLellan, argued that removing the LTA and streamlining the annual allowance would eliminate a significant element of complexity, emphasising that "simplicity is key".

"This would also provide an opportunity to introduce greater fairness, particularly between those saving in defined contribution pension schemes compared to defined benefit ones, and reduce any disincentives to save for retirement," he continued.

However, Butler stated that "realistically we’d be surprised if we saw any movement on the allowance at next week’s Budget".

"It was just twelve months ago that the LTA was frozen until 2026 and while it looks like the Chancellor may have some headroom in the public finances, we’re not expecting a give away to better off pensioner," he added.

Yet reports as to a potential increase in the LTA have persisted, with analysis from Royal London suggesting that unfreezing the lifetime allowance and reinstating the link to the Consumer Prices Index (CPI) would mean it would increase by 10.1 per cent in April 2023 and could encourage some people back into the workplace.

Royal London pensions and legal expert, Clare Moffat, also argued that the LTA is having a "particularly negative impact on senior clinicians in the NHS, a group essential to clearing the NHS waiting lists in the wake of the Covid 19 pandemic".

Adding to this, Quilter head of retirement policy, Jon Greer, stated: "While these changes may be wrapped up in an attempt to get over 50s back to work they look like they are mainly aimed at fixing the problem of NHS senior healthcare workers leaving the profession in their droves as a result of punitive pension taxation that make it expensive to take on additional hours or more logical to leave work entirely.

"Just at a point when the pressures on the NHS are mounting we cannot afford to see these key people being incentivised to leave the profession."

However, Aegon pensions director, Steven Cameron, emphasised that whilst an increase in the lifetime and annual allowances would be helpful, they shouldn't be restricted to just NHS doctors.

Cameron also argued that concerns around the money purchase annual allowance (MPAA) are "even more pressing", calling for an "immediate increase" from the current £4,000 to £10,000 a year to stop the pensions penalty many face if returning to work.

This was echoed by Canada Life technical director, Andrew Tully, who argued that the "pernicious MPAA" isn't just an issue for the wealthy, with analysis from the firm revealing that someone who has flexibly accessed their pension, earning just over £33,000 and, together with their employer, contributing 12 per cent will be caught by this tax charge.

Indeed, recent research from Canada Life also found that 62 per cent of over 55s with a defined contribution pension have never heard of the MPAA, while just 4 per cent know exactly what it is and how it works.

McLellan also backed calls for changes to the MPAA, suggesting that the Chancellor should also introduce an amount, for example £50,000 in total, that can be withdrawn from your pension before the MPAA kicks in.

"This should allow savers greater flexibility, protect against high levels of pensions recycling to double dip for additional tax relief and avoid unintended consequences for those who do access their savings," he stated.

Glancy also argued that MPAA should be disapplied to those who have accessed some of their pension savings simply to make ends meet, arguing that "this is a crucial time for the economy, and existing pension policy is actively holding the country back".

Moffat agreed, warning that the MPAA currently "hampers" any decision to return to work for any over 55s who have accessed their pension flexibly, suggesting that it would "greatly help" to raise this allowance to encourage people back into the workforce.

“But for those doctors in the NHS who have retired due to pension tax charges – this increase won’t make a difference if their only pension was the NHS pension as public sector defined benefit pensions aren’t limited by the MPAA."

McLellan also queried whether this would be enough to entice people back to the workplace, arguing that "ultimately, it’s unlikely that the reason many are choosing not to return to work is due to a technical pensions issue like the MPAA and more likely a result of long-term sickness or well-earned financial freedom".

He also argued that the biggest change that the industry should be prepared for is not tax related, but that the Chancellor could reveal plans to increase the state pension age to 68 sooner than the current 2044 date.

"To keep people in work longer, saving for longer, this could be the most impactful announcement the Chancellor could make next week, even if it is tempered by simplifying the tax allowances," McLellan stated.

"But with multiple reasons for people dropping out of the workforce earlier than expected and not returning, this carrot and stick approach may not have the desired effect."

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