For months, there has been a buzz about sweeping changes to pension tax relief in the upcoming Budget.
Many expected a shift to a flat rate of relief for pension contributions.
However, recent reports suggest this idea has been shelved, leaving many wondering what is next for pension reform.
Why drop the reforms?
If the Government has backed away from the flat-rate proposal, it could be to protect public sector workers.
Many of them benefit from defined benefit (DB) pension schemes, which guarantee retirement income.
Unlike private sector schemes, DB pensions would be hit hard by changes to tax relief, potentially leading to bigger tax bills for these workers, which is an outcome the Government may have wanted to avoid.
What does this mean for taxpayers?
The flat-rate reform may be off the table for now, but the Government could still have its sights on pensions.
Higher earners will keep receiving tax relief at 40 or 45 per cent, and those in DB schemes might escape any immediate changes.
However, the Chancellor might introduce smaller adjustments, such as cutting the annual allowance.
Currently, you can contribute up to £60,000 to your pension with tax relief each year.
Reducing this limit could bring in extra revenue for the Treasury, especially from wealthier individuals, without causing too much disruption.
Another target might be the 25 per cent tax-free lump sum, which allows retirees to take out a portion of their pension without paying tax.
Reducing or capping this benefit could be another way to raise funds without hiking Income Tax or National Insurance.
A rising cost to employer contributions?
There has also been talk about increasing mandatory employer pension contributions.
Right now, employers must contribute at least three per cent to their workers’ pensions.
If the Government were to push this higher, perhaps in line with Australia’s 12 per cent rate, businesses could see a steep rise in costs.
While this is not expected in the near term, it remains a possibility for future reform.
Pensions as investments into the economy?
Labour has shown interest in steering pension funds towards investing more in UK assets.
Though no official policy has been laid out, the idea is to boost domestic investment and stimulate economic growth.
However, some question whether this would truly benefit pension savers, especially if it means taking on riskier investments.
What’s next?
With the Budget deadline looming, Chancellor Rachel Reeves has until 25 October to finalise her plans.
Even though major pension reforms appear to be on hold, the Government still needs to find ways to raise revenue.
Pensions remain a likely target, so individuals and businesses need to stay informed.
Contact us today if you would like any advice on how to deal with any potential changes made by the Government.