Pensions have rarely been out of the headlines over the past decade, and this Budget is expected to be no different.

There’s every reason to believe that changes to the pension system could be on the horizon. Let’s explore some ‘what ifs’ to consider the potential impact.

At the moment, pension tax relief is delivered at the marginal rates of 20 per cent for basic-rate taxpayers, 40 per cent for higher-rate taxpayers, and 45 per cent for additional-rate taxpayers.

However, there have long been calls for this to change, with one of the most discussed options being a ‘flat rate’ of pension tax relief at or around 30 per cent.

This change would make pension saving more attractive for those on lower incomes, but it would represent a big reduction for higher earners, for whom pensions are a crucial part of wealth building and tax management.

Rachel Reeves, the Chancellor, has previously supported a similar measure, suggesting a flat rate of 33 per cent.

If this were to be implemented, it could lead to a change in how higher earners approach their pension savings, potentially reducing their contributions.

Another potential change could involve the annual allowance on pension savings, which was set at £60,000 in the 2023 Budget.

This is the maximum amount most people can contribute to their pensions each year with tax relief.

If the Chancellor decides to reduce this allowance, or introduce carve-outs for higher earners, it could be a significant money-spinner for a cash-strapped Treasury.

Such a move would limit the amount that could be tax-sheltered within pensions, potentially leading to higher tax liabilities for those who regularly max out their contributions.

There’s also been speculation that the Government could increase the mandatory employer pension contributions.

Currently, employers must contribute three per cent to their employees’ pension schemes, with the combined minimum rate for both parties being eight per cent.

However, Labour has reportedly been in discussions with pension providers about adopting a system similar to Australia’s, where employers contribute as much as 11 per cent, set to rise to 12 per cent by 2025.

If the UK were to follow suit, this would dramatically increase the cost burden on businesses, particularly smaller ones, potentially impacting their profitability and investment capacity.

Such a policy could also force employers to rethink their overall compensation strategies, possibly affecting wage growth.

Another possible target for reform is the 25 per cent tax-free lump sum that pension savers can currently draw upon retirement.

There’s growing speculation that this could be reduced or capped, which would mean that retirees could face a larger tax bill when accessing their pension savings.

This would likely be an unpopular move, but it could be seen as a way for the Government to increase tax revenues without directly raising income tax or national insurance.

Labour has also indicated an interest in encouraging more investment within the UK from pension funds.

This could be done by introducing rules requiring a portion of pension funds to be invested in specific UK assets, possibly higher-risk ones.

While this might be aimed at stimulating the UK economy, it raises concerns about whether such investments would be in the best interests of individual savers.

The outcome of this policy could influence the risk profiles of pension funds and the returns they generate for future retirees.

These ‘what ifs’ illustrate the potential shifts in pension policy that the Autumn Budget could bring.

Whether it’s changes to tax relief, contribution rates, or investment strategies, these decisions could have far-reaching consequences for how we plan for retirement.

We’ll continue to monitor developments closely as we approach Budget day.

For assistance and guidance in light of the upcoming Budget, please get in touch with your Seymour Taylor representative or contact us on enquiries@stca.co.uk 01494 552100.

This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing on 21 October 2024.

Posted in Blog news.