Budget 2024 preview: What’s in store for pensions…

Because when Sir Keir Starmer and his wife walked down Downing Street to applause on July 5 this year, it was clear that the identity of frontline politics had changed once again.

Yes, the delighted onlookers were more diverse in age and background, but the corporate atmosphere that had defined the past 14 years of Whitehall politics was also gone.

And then Lord Alli spoiled for presents.

So Taylor Swift broke records at Wembley Arena with her ages tournament (stimulating not only the nation’s pleasure but significant upward inflationary pressure) Keir Starmer found himself at the center of a scandal that belied his earlier statements about political correctness. Several of his cabinet colleagues were given tickets to that tournament, apparently for free.

How will the work of taxes on the budget increase?

While all this was happening, Labour’s first female chancellor prepared the country to pay more taxes. Pointing out – with some tonal embellishment – that the Tories had left her party a £22billion “black hole” to fill, she said. News agents podcast that taxes would “have to go up” in her first tax return.

But that was also the other way around.

Because by the time the Labor Party Conference took place in September, Reeves found herself facing accusations that she was too low-key in her rhetoric. Indeed, one Morningstar-rated fund manager has already told us as much.

In her Liverpool speech, she suddenly became more upbeat. But this was not the victory it appeared to be.

Within three months of taking office, the new government had backed itself into a real corner. He pledged to freeze the main rates of income tax, national insurance and VAT at the election. But in office he abruptly denied there would be a return to austerity.

Then where would the money come from? Predictably, pensions are now at stake again. Talk of it is already affecting investor behavior.

“Constant rumors and speculation about the future of retirement tax incentives – primarily the tax treatment of pension contributions and tax-free cash in retirement – are extremely damaging,” says AJ Bell chief executive Michael Summersgill.

“People are making financial decisions partly based on pre-budget speculation and that is destroying people’s confidence in pensions in general.

“Our client data reflects this uncertainty, with pension contributions up almost 60% in September compared to the same month last year and the number of people accessing tax-free cash around a third higher than the average over the past year.”

What will work do to my pension?

There is some good news. New reports indicate that a planned ‘raid’ on pension tax cuts is potentially out of the question. The Chancellor has reportedly been warned that adjusting tax relief in favor of the Treasury (possibly through a flat relief rate of around 30%) would hit public sector workers too hard.

Other options are on the table, including a change to the rules on tax-free cash withdrawals from private pensions, a hallmark of the so-called pension freedoms announced in Budget 2014 and rolled out in 2015.

Currently, savers can usually take up to 25% of the amount accumulated in any private pension as a tax-free lump sum, up to £268,275. These thresholds could be adjusted very easily, generating over £5 billion. And that’s not even in the most punitive scenario.

Limiting the benefit to a maximum withdrawal of £100,000 could raise £5.5bn, says tax policy commentator Dan Neidle, director of tax thinktank Tax Policy Associates.

What changes could the budget bring?

Morningstar.co.uk previously looked at the potential tax changes in the October Budget in detail:

• Inheritance tax
• Capital Gains Tax
• Pension rules

Will I have to wait longer to access a private pension?

Pension freedoms could also change in other ways.

“While we’re talking about taxation and pension reform, I wouldn’t bet against raising the minimum age at which people are entitled to access private pensions,” says Tom McPhail, director of public affairs at The Lang Cat. .

“Currently 55 going to 57 in 2028. A case can (definitely) be made for raising to 60 soon.”

And the inheritance rules could change.

At the moment, a saver who inherits the private pension of someone who dies before the age of 75 does so without incurring any tax.

If the deceased died after reaching the age of 75, pension providers deduct up to 45% of the pension in tax if the beneficiary receives the money as a lump sum. This is done through the Pay As You Earn mechanism. But Inheritance Tax (IHT) rules could now come into play at the Budget.

Although Inheritance Tax (IHT) is almost universally hated by the very small population of people who actually pay it, the Chancellor could apply the standard IHT rate of 40% to all pension inheritances and in the process raise around £1 billion pounds sterling. That’s according to Neidle.

What should private pension savers do?

If you haven’t already guessed, one option available to concerned savers and investors is to bring their tax-free lump sum withdrawals into retirement.

Remember, however, that taking tax-free cash is an irreversible decision.

“Taking your tax-free cash is an irreversible decision and, assuming the Chancellor doesn’t pursue a disastrous raid on tax-free cash, these people could find themselves in a worse financial position in the long term,” says Summersgill.

For those with less need for immediate cash, however, topping up a private pension such as a SIPP is another option before a big change. According to Bestinvest, a consumer investment research and savings platform, its clients generated a 10-fold increase in retirement contributions last month compared to the same data in September 2023.

“Despite the uncertainty, topping up a personal pension such as a SIPP will remain an effective way to secure your retirement regardless of the changes to Reeves pensions later this month,” says the firm’s personal finance analyst Alice Haines.

To this end, anyone who is feeling out of their depth should seek professional advice. Perhaps the Chancellor would be wise to do the same!