The last 14 weeks have been disastrous for pensions.
Keir Starmer and Rachel Reeves’ dire warnings of an impending tax raid have shattered the finely balanced confidence that savers have been starting to build around pensions after years of government tightening.
Britain’s biggest investment platforms say savers have been taking emergency preventive measures that could damage their long-term finances, such as cashing out their pensions early or accumulating more than necessary.
Raid: Pensions are too tempting a target for Chancellor Rachel Reeves (pictured) to ignore as a source of funding, experts say
And no wonder, given the menu of dire options the Chancellor could choose from to plug the £22bn hole in the public finances.
This week the pension tax relief reform was finally scrapped.
But pensions are too tempting for the Chancellor to ignore as a source of funding, experts say. So, apart from the tax-free lump sum, what are the other most likely targets in the October 30 budget?
Leading pensions experts tell me that the easiest, most lucrative – and therefore most likely – change is a new National Insurance tax on the contribution employers pay to workers’ pensions.
Currently, employers do not pay any national insurance on the money they contribute to pensions on behalf of their staff.
The Institute for Fiscal Studies (IFS) think tank says this rule “should be reformed”, adding that if employers were charged NI for pension contributions at the same rate as salaries (13.8 per cent ), this would raise around £17 billion a year.
Tom Selby, public policy director at stockbroker AJ Bell, says: “This looks like the easiest way to raise cash quickly if the government wants to raise pension money.” It wouldn’t be a surprise.
However, Selby says he would expect there to be a reduced tax rate on employer contributions, rather than the full 13.8 per cent tax charge.
Robert Salter of tax firm Blick Rothenberg echoes this and agrees it is the most likely change.
While it would not result in a direct impact on pension savers, it warns that it could lead to employers reducing the amount they pay into their workers’ pensions, or affect future pay rises as companies absorb the new cost.
Another option for the Chancellor is to make pension funds subject to inheritance tax, a change that experts say could be achieved overnight.
Target: Pension experts say the easiest, most lucrative and therefore most likely change is a new National Insurance tax on the contribution employers pay to workers’ pensions.
Unlike other savings or housing, pensions do not currently form part of your estate upon death and are therefore not subject to tax.
Nicholas Nesbitt, partner at accounting firm Forvis Mazars, says a new inheritance tax is one of the most likely changes.
It says: ‘The taxation of death pensions has long been considered anomalous: you get tax relief on contributions; You get tax-free investment growth and can transfer the funds tax-free in the event of your death.
Given the level of wealth accumulated in pensions, we expect the new government to seek to tax pension funds in the event of death in the future.’
One option would be to say that the first £100,000 of pension savings is free of inheritance tax, but anything above this amount would result in a 40 per cent tax bill.
The IFS think tank has been urging the Government to make this reform, which it says could raise several hundred million pounds a year in the short term, rising rapidly thereafter, potentially up to £2 billion a year. .
Also among the most likely targets is restricting tax-free pension cash, Nesbitt says.
He says: “The government could easily reduce the amount of tax-free cash that individuals can withdraw from their pensions.”
The tax-free pension lump sum is one of the most attractive features of saving for a pension. Currently, anyone aged 55 or over can withdraw the first 25 per cent of their pot up to £268,275 without incurring any tax liability.
Left-wing think tank Fabian Society says the Government could raise huge amounts of revenue by slashing the amount that can be withdrawn tax-free to £100,000.
Although restricting the tax-free pension lump sum to 25 percent would be fairly simple to implement, it would not raise significant amounts of money for the state this year, Selby says.
j.beard@dailymail.co.uk