For a newish government a few months into power, the tone from both chancellor Rachel Reeves and Prime Minister Keir Starmer has been pretty doom laden so far.
There was an attempted reset at the Labour party conference in Liverpool, but overall the messaging has been resolutely downbeat.
My esteemed colleague Alison Gay has made the point that now is the time for the government to do things that are unpopular, in that there is a clear five-year period where things can go down badly before another general election.
I absolutely agree with Alison’s observation here – this is the moment to get the unpopular stuff away. And that doesn’t bode well for the Budget on 30 October.
We’ve been told to expect much unpleasantness generally and, for advisers and their clients, it’s not surprising there’s a degree of anxiety out there. We’ve been told to brace for impact.
Going into the election, Labour’s number one mission (apart from winning) was to make the UK the fastest growing economy in the G7. To achieve that, they therefore need to kickstart stuff as quickly as possible. This is a government in a hurry, and it’s got plans and ideas to achieve its aims. It’s also got particular plans for the pensions industry, and what it wants to do with the capital that sits in the sector.
Bearing in mind the window of opportunity, if it were me I’d want to be shovelling as much into this first Budget as I could.
On the pensions front, I can think of four ‘known unknowns’ we could hear about come the 30 October.
Let’s deal with the first two first:
- Pension tax relief
- Removing employer relief on National Insurance on pension contributions
Reform to pension tax relief is complicated to deliver, but not impossible. And there may be an argument to say, if you’re going to do it, now is the moment.
Yet removing National Insurance relief seems like the more likely measure. It’s quite simple to do, and would raise the government up to the best part of £10bn, depending on exactly how they did it and any mitigating behaviours that arise as a result.
Also, if you start playing around with pension tax relief, it has knock-on consequences, not least for defined benefit pension schemes.
Recent reports suggest the chancellor has been persuaded that, of the tax raising measures open to her, reforming pension tax relief isn’t one she should pursue.
A note on timing
Yet with both of these measures, even if a change to the rules is announced, it can’t be rolled out on the day of the Budget due to all the changes that would be required to payroll, systems and so on.
An announcement on this scale might come with an effective date of next April, or even April 2026, depending on how much time the government feels is needed.
But what might also happen on Budget day is the introduction of some anti-forestalling measures. They could say: ‘We’re going to do this. While we can’t do it immediately, we know some people will try and game the system.’ So there may be a measure put in place that says, for example, any sudden acceleration in contributions will be caught by the new rules.
From an adviser’s point of view, if you’ve got a client who wants to make some pension contributions and they’re planning on doing it anyway, arguably there is a case to do it ahead of the Budget just in case. But as is always the case, clients shouldn’t feel the need to up-end their long-term financial plans just on the off-chance the rules are changed.
So what are the other known unknowns?
3. Pension death benefits
At the moment, pension death benefits are largely free of ‘death taxes’/inheritance tax (IHT).
While there may be income tax to pay for the beneficiaries depending on death before or after age 75, it’s not particularly onerous. In fact, you could say it’s pretty generous. That to me seems like a likely target for a tax charge to be imposed.
There is speculation that pensions could be brought under IHT rules, or that we could see a change to death benefits in drawdown.
If she wanted, Rachel Reeves could decide to impose a change like this with effect from the strike of midnight on Budget day. That’s it, it’s a done deal – these are the new rules that apply.
From a planning point of view, clearly there’s not much that can be done now if this turns out to be the case. But you can see the appeal politically – it raises taxes, and could be pitched so it only hits the wealthy. Plus it’s consistent with this government’s mindset of taxing wealth rather than workers.
4. Tax-free cash
The other known unknown we’ve got on pension taxation, and the one which has been subject to a lot of speculation, is tax-free cash.
With the current lump sum allowance set at £268,275, the government could choose to dial that down to maybe £250,000 or £225,000. It’s a lever that’s relatively simply to pull, and would only affect the very wealthy.
There are problems though, the main one being it’s retrospective taxation. People have got an expectation they’re going to get this money, and it causes complications for public sector workers.
Tax-free cash is also one of the few elements of the pension tax system that people actually understand.
Advisers and their clients face a tough call here – a risk avoidance strategy suggests take the money out now, but clearly that runs the risk of clients left with money they didn’t actually need to take, and which will ultimately get taxed anyway if reinvested outside the pension system.
So there we have it – the four known unknowns on pension taxation. There are also some unknown unknowns but, obviously, I don’t know what they are.
Tom McPhail is director of public affairs at the lang cat
