Rishi Sunak: What to expect from budget with Victoria Scholar
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Pension experts warn that if the Chancellor hikes pension taxes again it will deter yet more people from setting money aside for their future. Instead, they are calling on Sunak to scrap fiddly rules that confuse savers and trigger shock tax bills.
Constant tinkering has made saving for retirement too confusing and Rishi Sunak should focus on simplifying the system instead.
The Chancellor has already targeted pensions once this year, by freezing the lifetime allowance at £1,073,100 until 2026 in his March Budget.
The lifetime allowance is the maximum you can build up in your pension and workplace savings before incurring a punitive 55 per cent tax charge.
More than 1.6 million pension savers will be caught out and it could be cut again today.
Interactive Investor’s head of investment Victoria Scholar said:”Nothing can be ruled out as the Chancellor looks to plug the deficit.”
The lifetime allowance stood at a thumping £1.8 million a decade ago but Tom Selby, head of retirement policy at AJ Bell, said the Treasury has shrunk it dramatically, leading to “horrific” complexity and uncertainty.
“If Sunak cuts the lifetime allowance to £900,000 or even £800,000 today, even more savers would get caught.”
The lifetime allowance should scrapped altogether, said Andrew Tully, technical director at Canada Life “It sends the wrong signal for savers as it punishes them for doing the right thing and investing successfully.”
Tully said the £40,000 annual allowance for pension contributions already limits how much people can save each year and claim tax relief. “Sunak should simply let the annual allowance do its job to restrict the tax relief available on contributions.”
Sunak may cut the annual allowance to just £30,000 or £20,000 to save money. Or he might cut tax relief on pension contributions for higher earners, currently paid at 40 or 45 per cent.
Alternatively, he could even make unused pension pots subject to inheritance tax on death, whereas now they are exempt.
Everything is still in play with the Budget statement just hours away.
Some have even suggested the Chancellor could scrap the hugely popular benefit allowing 25 percent tax-free lump sum pension withdrawals at retirement.
Tully said any of these measures could deter people from saving for the future at a time when too many are already failing to put enough aside.
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Raj Mody, global head of pensions at PwC, also urged Sunak to leave pensions alone. “While the Government needs to cover spending and repay debt, it would be wise to avoid any further changes to the pensions tax regime, whether that be the lifetime and annual allowances, or the tax-free cash lump sum at retirement.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, called on the Chancellor to simplify rules on the Money Purchase Annual Allowance, which limits how much you can pay into a pension after taking money out.
The rules were introduced in 2015 to stop people accessing their pension and re-investing contributions to benefit from further tax relief but Morrissey said: “It adds needless complexity to the system, and stops people doing the right thing.”
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