Autumn Budget – how Labour might change pensions

The rumour mill has been running red hot in recent weeks with speculation of major pension changes.

Thankfully one of the rumours – the introduction of a flat rate of tax relief looks like it’s been shelved after concerns of its impact on public sector workers. The decision hasn’t been officially confirmed, but if introduced it would have been very complex and even more confusing to an already tangled system.

But there are other options still on the table that could affect your pension planning.

One of the highest profile is the potential reduction of how much tax-free cash people can take. This is a rumour that’s caused a lot of concern with people looking to take their tax-free cash now – a move that could have huge impacts on their retirement.

This article isn’t personal advice. Pension and tax rules can change, and benefits depend on your circumstances. Money in a pension is usually accessible from age 55 (rising to 57 in 2028). If you’re not sure what’s right for you, ask for advice.

Tax-free cash

We’ve seen tax-free cash tinkered with before – it was reduced to a maximum of £268,275 by the last Government. This has prompted speculation if it would be eroded further in future.

These rumours haven’t helped even people whose tax-free cash entitlement is well below the limit from wondering what the future holds and potentially making decisions they might come to regret.

Taking money out of a pension now might deprive it of future investment growth and leave it subject to a whole host of taxes like inheritance, capital gains and dividend tax.

We could also see people try reinvesting surplus tax-free cash they’ve taken back into their Self Invested Personal Pension (SIPP) and potentially falling foul of recycling rules and incurring a fine. Even if the money is put in a bank account there’s a risk its purchasing power is eroded over time by low interest rates or inflation.

Ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging. People need certainty to make long-term plans, and they just don’t have that right now. The sooner changes like restricting tax-free cash can be ruled out, the more people can focus on the long term again.

Inheritance tax treatment of pensions

Another potential target for the budget is the inheritance tax treatment of pensions. Right now, in most cases, a pension is treated as being outside of a person’s estate for inheritance tax purposes.

This sets it apart from ISAs and can lead to people running down other savings in retirement before touching their pension which can then be passed on to loved ones.

Making pensions subject to inheritance tax could potentially raise a decent chunk of money for the government while incentivising people to spend their pot during their lifetime. We could also see people gifting more to family as a means of mitigating this tax. And this could play a huge role in helping people get onto the property ladder.

Employer national insurance

This has been less talked about in the press but we could also see employer national insurance being levied on workplace pension contributions.

As it stands employers pay national insurance contributions of 13.8% on all earnings above £175 per week, not including pension contributions. But this employer incentive looks to be firmly in the Chancellor’s sights.

However, a move like this comes with drawbacks.

It would push up employer costs and the concern is that they could look to recoup this cash either in the form of smaller pay rises or refusing to increase pension contributions.

Given the ongoing debate around adequacy and how we can help people better prepare for retirement, this could be a backward step.