The case for a ‘Pensions Tax Lock’

Rachel Reeves’ first Budget has been preceded by feverish speculation over whether pensions could be in the firing line, as the new government scrabbles to raise cash to plug a supposed £22 billion ‘black hole’ in the nation’s finances. However, having already drawn the ire of retirees by means-testing the Winter Fuel Payment, the Chancellor will likely be cautious about hitting older people for the second time in the space of a year.

Pensions tax relief

Recent reports suggest Reeves has backed away from the idea of fundamentally reforming pensions tax relief by introducing a ‘flat rate’ of tax relief set somewhere between 20% and 30%.

This idea always felt like a non-starter, primarily because implementing such a reform would effectively result in millions of ‘working people’ – exactly who the Chancellor and Prime Minister have said they will protect – being hit with tax hikes.

Having just settled pay disputes with NHS workers, it is hard to imagine the new government will be spoiling for another fight over public sector pensions.

Tax-free cash

The other suggested target on 30 October is pensions tax-free cash, with some suggesting the maximum someone can take in their lifetime – currently set at £268,275 – should be lowered. Any move along these lines would be deeply unpopular and potentially hugely complicated too.

What’s more, neither reforms to pension tax relief nor paring back tax-free cash entitlements would likely deliver the substantial in-year savings the Treasury is looking for.

The case for a ‘Pensions Tax Lock’

The level of uncertainty created ahead of the Budget has real-world consequences, with both contributions and the number of people taking their tax-free cash rising in recent months.

It is clearly not desirable that some savers feel forced to take decisions based on rumour and speculation rather than their long-term retirement goals. Given one of the key promises made by the new government was to deliver economic stability to Brits, Reeves should use her Budget to nip this issue in the bud by pledging not to make major changes to either pension tax relief or tax-free cash.

This ‘Pensions Tax Lock’ would send a clear signal to savers that the goalposts won’t be moved and should give people more confidence to take decisions based on their long-term interests.

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