Cutting pension tax rules would be ‘a real blow’ – fears for retirees as Budget looms

The Budget will be announced later this month, with pensioners and retirement savers holding their breath as they await news of any changes which could hit their pockets. A leading finance analyst has warned of two changes which would be bad news for Britons saving for retirement.

Sarah Coles, personal finance analyst, Hargreaves Lansdown said: “Chancellors tend to spend most of their lives between a rock and a hard place, and Rishi Sunak faces the Budget with things looking both rockier and harder than usual.

“The Government has been left with an enormous amount of debt after record peace-time Government spending to tide us over during the crisis.

“Sunak has already announced higher NI to help pay for it, and made it clear that he’s not keen on any more tax rises at the moment. And yet, the threat of inflation means he can’t rely on cheap borrowing as his get-out-of-jail free card forever either.

“There’s going to be a temptation to use this Budget to find alternative ways to spend less, and there’s a risk that in the process it could put more barriers in the way of people doing the right thing, by saving and investing for their future.”

Instead, Ms Coles said changes in the Budget should be focussed on simplicity and concentrate on replacing the rules designed to stop pension recycling and rethinking the rise in the Normal Minimum Pension Age.

Ms Coles outlined two potential changes that could be coming in the Budget which could have a negative effect on Britons’ ability to save towards their retirement.

READ MORE: DWP update: Benefit claimants could be eligible for extra £1,500 payment

Any cut to the pension lifetime allowance

The current pension lifetime allowance is £1,073,100, with people having to pay tax if their pension pots are more than this amount. This could be reduced in the next Budget, and according to Ms Coles, this could have more of an impact than people may think.

She said: “This would cut the Government’s bill for tax relief, and because most people see £1,073,100 over a lifetime as the kind of sum that only bothers the very wealthiest, it would be unlikely to spark much of a backlash.

“However, in reality, this isn’t a vast sum of money in pension terms, and many public sector workers could easily run up against the lifetime limit without thinking of themselves as particularly wealthy. It’s also the kind of retrospective taxation that makes it nigh-on impossible to do the right thing for retirement.”

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A haircut for the pension annual allowance

A reduction in the annual pension allowance, which is currently £40,000 could also be on the cards, which Ms Coles said could particularly damage the flexibility needed by people who own their own business.

She said: “A cut, for example from a £40,000 a year limit to a £30,000 a year limit, would save the Government a chunk of tax relief, without worrying enormous numbers of people who can’t imagine ever paying this amount of money into their pension in a single year.

“However, this kind of flexibility is vital for people who have had lumpy income during their career, who need to make up for lost time.

“Business owners, for example, may end up neglecting their pension during their working life, because they put everything into the business and plan to retire on the proceeds of selling up. Cutting how much of this they can put into their pension at that point could be a real blow.”

According to their research, someone who starts contributing £100 each month to their pension starting at age 22, and who increases that amount with earnings growth of three percent, could end up with a pension pot of £354,600 by age 68.

A massive £70,900 of that pension pot would be the result of the tax relief given by the Government, making up 20 percent of the total. At present, basic rate taxpayers enjoy tax relief at a rate of 20 percent on their personal contributions, which means by putting four percent of their pay towards their pension, they would actually save five percent.

Higher rate taxpayers receive an even more generous rate of tax relief of 40 percent, allowing them to boost their pension pot significantly. According to Aegon, a person putting away £300 each month from age 30 could rack up retirement savings of £877,900 by the time they turn 68. Of this total, £351,100 would be the direct result of tax relief.

Aegon has suggested that if a flat rate of 30 percent tax relief for pension savers was introduced, a higher rate tax payer could lose out on £125,400 in retirement savings, with their pension fund falling from £877,900 down to £752,400 at age 68.

If a flat rate of 30 percent came into effect, the same higher rate tax payer would have to up their monthly contribution by £50 every month to bridge the gap, putting away £350 instead of £300.

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