Sunak urged to abort tax attack on pension pots
CHANCELLOR Rishi Sunak risks destroying the UK’s retirement savings culture if he unleashes another tax attack on our pensions in today’s Budget.
Pensions experts are calling on Sunak to resist the temptation to hike pension taxes again, as this will deter more people from setting money aside for their future.
Instead, they want him to scrap fiddly rules that confuse savers, who often end up with an unexpected tax bill as a result.
Experts say that successive chancellors have made saving for retirement too confusing and the system should be simplified.
The Chancellor targeted pension wealth in his March Budget, by freezing the lifetime allowance at £1,073,100 until 2026. This is the maximum you can build up in workplace and personal pensions before incurring a punitive 55 per cent tax charge, and more than 1.6 million are set to be caught out.
A decade ago that allowance stood at a thumping £1.8 million but AJ Bell head of retirement policy Tom Selby said the Treasury has shrunk it dramatically, leading to “horrific” complexity and uncertainty.
“If Sunak cuts the allowance to £900,000 or even £800,000, as has been suggested, even more savers would get caught.”
Andrew Tully, technical director at Canada Life, would like to see the allowance scrapped altogether: “It sends the wrong signal for savers as it punishes them for doing the right thing.”
Tully said the £40,000 annual allowance for pensions already limits how much people can save each year and claim tax relief. “Sunak should simply let that allowance do its job to restrict the tax relief available,” he said.
Others fear that Sunak may either cut the allowance to just £30,000 or £20,000, or reduce tax relief on pension contributions for higher earners, currently paid at 40 or 45 per cent.
Alternatively, he could even make unused pension pots subject to inheritance tax on death, whereas now they are exempt.
Some reports have suggested that the Chancellor could block 25 per cent tax-free lump sum withdrawals at retirement.
Tully said any of these measures could put people off from saving for the future at a time when too many are already failing to put enough aside.
Raj Mody, PwC’s global head of pensions, also urged Sunak to leave pensions alone: “While the Government needs to cover spending and repay debt, it would be wise to avoid any further changes, whether that be the lifetime and annual allowances, or the tax-free cash lump sum at retirement.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, called on Sunak to simplify rules on the Money Purchase Annual Allowance, which limits how much you can pay into a pension after taking money out.
The rules were introduced in 2015 to stop people accessing their pension and re-investing contributions to benefit from further tax relief but Morrissey said: “It adds needless complexity to the system, and stops people doing the right thing.”