There is much speculation on what the Chancellor will implement in his Budget on 3rd March 2021. This week we take a look at possible changes to tax relief and other pension related matters.
25% Tax Free Cash Lump Sum To Go?
Some have suggested this may be on the cards but we suspect there would simply be too many changes to the whole pension system for this to happen e.g. having to totally unravel every single pension scheme in the UK, change the rules and implement those changes. This would cost £billions. We suggest, if the Chancellor did do this then it changes every persons current position in their planning for retirement – a vote loser. That said, we can se an easier way to raise revenue would be to target higher rate tax payers (40%) and additional rate tax payers (45%) and allow tax free cash still to be paid tax free to 20% tax payers but for those in higher tax bands, a declaration via self assessment that 40%/45% tax payers pay a marginal tax charge of either 20% or 25% via tax returns.
Reduce Annual Allowance and Freeze Lifetime Allowance?
This is relatively easy to implement as annual allowance and lifetime allowance are already in place, so it would be easy for both government, HMRC and pension providers to implement either a freeze or reduction of allowances. That said, the government is already having problems with senior emergency and healthcare workers not working as much or not doing ‘over time’ as there is little point in workers are going to pay more taxes for exceeding allowances, so government increased threshold income and adjusted income tests when calculating tapered annual allowances so that less higher earners got caught for taxes and will now take on more work.
Tax Free Pension Death Benefits to Go?
On premature death, before age 75, pension funds can be paid to loved tax free. This seems out of step that most other assets on death are taken into account when calculating inheritance taxes, it would be so simple to include the value of pensions in the estate calculation and raise further revenue.
Move Early Retirement Pension Ages?
The state pension retirement age is 67 and will increase to 68 from 2044. It would be an easy move for state pension age to increase to 68 at an earlier date. That said, not a vote winner. The ‘spin-off’ from this is that private and company pension schemes as a minimum age for early retirement is 10 years before state pension age. It could be that from a private and company pension early retirement ages could be extended to age 58 or even 60 to force workers to work on and pay more income taxes.
Single Rate Tax Relief?
This has been expected for a number of years now but Brexit and then the pandemic appeared to push the government to delay implementation of any changes to tax relief. In the longer term, we can see an announcement being made to move to a flat rate of pension tax relief of either 25% or 30% for all. This will save huge sums in tax relief granted to higher earners. A similar thing has already been done for financial/interest expenses on 2nd property and buy to let mortgage interest expenses, all down to 20% relief, so this is likely on pension tax relief but we suggest it could be legislated for now, but implemented in say 2 years.