Opinion: Pension reforms the chancellor could consider in the Budget

There is little doubt that Rachel Reeves’ Budget statement on October 30 – the first from a Labour chancellor since Alistair Darling delivered his third and final one in March 2010 – will see some seismic changes in many areas.

Having revealed what she calls a £20 billion ‘black hole’ in the nation’s finances, she has a tricky balancing job to do if she is to provide her cabinet colleagues with the resources to fulfil many of the promises made during this summer’s election campaign on the one hand, and stay within her own fiscal rules on the other.

When it comes to pensions, we simply don’t know what measures she might introduce, but it seems certain that there will be some changes to the current system.

The possible reforms fall into two broad categories: rules about building up a pension pot, and rules about drawing your pension. In addition, we may see incentives introduced to encourage pension funds to invest in the UK economy.

Let’s take a closer look at what might be in store.

Scott Hansell of Lovewell Blake Financial Planning (Image: Lee Blanchflower)

Pension Saving

- Auto-enrolment changes: We have already seen some measures legislated for, such as lowering the starting age for auto-enrolment from 22 to 18, and starting to calculate contributions from the first pound earned, rather than from the current £6,240 starting point. Given that there will be no need to introduce new legislation to bring these changes into effect, expect to see this happen.

- Restriction on pension tax relief: Currently higher and additional rate taxpayers can claim extra relief on their contributions through their tax return. Many Labour politicians have pointed out the perceived unfairness of higher earners getting the biggest reliefs, and Rachel Reeves has in the past argued in favour of a flat rate of 33pc relief for all. Although this is not Labour policy (and no longer Reeves’ view), the whole system of pension tax relief is likely to be in her sights, and we shouldn’t rule out changes.

- Lifetime Allowance: When Jeremy Hunt abolished the limit on what could be held in a pension in his last Budget as chancellor in April this year, Labour opposed the move. However, the manifesto was silent on the matter, and the party has not said it will reintroduce a limit – something which would be practically difficult and politically toxic. So change here is less likely.

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Drawing Your Pension

- Minimum pension age: The age at which you can access your pension is already due to rise from 55 to 57 in 2028, and a further rise to 60 has been suggested. This is likely to happen at some stage, although it would need a long notice period so that those approaching retirement age could plan accordingly.

- Tax-free cash: The ability to access up to 25pc of your pension pot tax-free (up to a maximum of £268.275) is an extremely popular aspect of the pension system (and a big incentive for people to save). It would be a brave chancellor who tinkered with it – so expect this to remain unchanged.

- Minimum secure level of income: This is an idea which some commentators have put forward, but which might prove too radical for politicians, especially as it would involve a significant reversal of the pension freedoms which have been in place for almost a decade. It entails a mandatory minimum secure level of income before being able to access any funds in the pension pot beyond that which is necessary to guarantee that secure minimum.

- Inheritance Tax: Currently a pension pot falls outside the scope of IHT - if death occurs before the age of 75 then no tax at all applies; if after 75, the beneficiary pays income tax at their marginal rate. This is a useful IHT planning tool which the chancellor may not be able to resist making less generous, at the very least.

Incentivising Pension Funds To Invest In The UK Economy

This is something which the last chancellor Jeremy Hunt mentioned occasionally, and it is a measure which also has Labour support: enabling funds held in some defined benefit and workplace defined contribution pensions schemes to be used to invest in project and companies which are deemed supportive of the UK economy.

The Labour manifesto promised to ‘act to increase investment from pension funds in UK markets’ and ‘adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC’ – so some form of measure to implement this seems quite likely.

Rachel Reeves’ first Budget statement will be delivered on Wednesday October 30.