Stay away from our pensions! Warning to Chancellor over autumn tax hikes

Chancellor Rachel Reeves faced calls last night to dismiss the possibility of stringent tax increases on pensions, after witnessing half of her financial flexibility erode within days.

Concerns are escalating that retirement funds will be a key target for the Chancellor in the Autumn Budget, as sluggish economic growth and amplified borrowing expenses create a substantial deficit in government finances.

Pension Tax Concerns Rise as Economic Headroom Shrinks

Oxford Economics, an advisory firm, cautioned that approximately £5 billion of the £9.9 billion contingency Reeves had allocated to meet fiscal regulations this week has already disappeared due to surging bond yields.

The Institute for Fiscal Studies (IFS), a prominent think-tank, indicated that the precarious condition of the economy and public finances suggests a ‘strong likelihood’ that tax hikes will be necessary later in the year.

‘This raises the potential for months of uncertainty regarding the nature of these tax increases,’ stated IFS director Paul Johnson, identifying ‘a pension raid’ as a potential avenue.

He emphasized that even ‘mere speculation’ surrounding such measures ‘can inflict economic damage’ – as demonstrated prior to the previous Autumn Budget when savers hastily withdrew funds from their pensions to evade prospective higher taxes.

Potential Pension Tax Changes Under Scrutiny

Speculation intensified regarding potential tax increases on pension savings as Chancellor Reeves encountered challenges balancing the budget. Options under consideration reportedly included reducing tax relief on pension contributions for higher earners and decreasing the tax-free lump sum withdrawal limit at age 55, from a potential £268,275 to £100,000.

Ultimately, Reeves opted against these specific measures, but instead implemented a revised inheritance tax approach by incorporating pension funds into the tax framework for the first time.

Now, anxieties are emerging about a possible renewed focus on pension taxation in the forthcoming Autumn financial statement.

Experts Advocate Against Pension Tax “Raids”

However, former pensions ministers Sir Steve Webb and Baroness Altmann have cautioned against such a move. Speaking to the Mail, they jointly stated that Reeves should publicly eliminate the option of targeting retirement savings to prevent a recurrence of the previous instability. They warned that actions against pensions would diminish the appeal of saving for retirement, potentially disadvantaging individuals in their later years.

Sir Steve Webb, representing pension consultants LCP, articulated: ‘Pensions are inherently long-term, involving funds accumulated over decades and disbursed over subsequent decades.’

‘This necessitates stability and predictability for savers, enabling confident investment and planning, rather than persistent exposure to abrupt and drastic alterations in tax regulations. It would be exceptionally beneficial if the Chancellor acted promptly to rule out significant modifications to pension tax relief.’

Uncertainty Around Pension Tax Changes Deters Saving

Baroness Altmann observed: ‘Each instance of pension tax change rumors triggers a rush among individuals to withdraw funds from their pensions or decrease their contribution levels.’

‘This uncertainty fuels apprehension and undermines efforts to enhance retirement income security and sustained economic growth.’

Tom Selby, public policy director at broker AJ Bell, noted that prior speculation regarding tax changes last year precipitated ‘a notable surge in savers making critical retirement decisions, such as accessing their tax-free cash, driven by fears of potential Chancellor intervention’.

He further suggested: ‘Instead of awaiting a repetition of such events, the Chancellor should pledge a Pension Tax Lock, explicitly ruling out alterations to tax-free cash allowances or tax relief for the remainder of this Parliament, at a minimum.’

‘This would allow Chancellor Reeves to affirm her commitment to supporting savers and retirees.’