A raid on UK pensions, in the form of reducing the tax reliefs currently used by the government to encourage taxpayers to save for their futures, was today being announced as the likely scenario as Chancellor Philip Hammond scrambles to plug a so-called “£2bn black hole” in his budget.
The news prompted warnings from pensions industry specialists that it would be a “risky”, short-term strategy, as it would further dis-incentivise people to save for their retirements.
The black hole appeared after Hammond was forced to abandon a plan, announced in his budget earlier this month, to increase the national insurance contributions of self-employed individuals, in the wake of opposition.
The reduction in tax reliefs hasn’t been officially announced, but has been widely reported in the UK’s media over the weekend and today. “New tax raid on pensions: OUTRAGE at Hammond’s plan to fill £2 billion budget black hole” was the Daily Express‘s headline this morning.
The Sunday Times quoted Treasury sources as saying Hammond would stick to his pledge not to increase government borrowing, and thus “would have little choice but to target the tax reliefs on pension saving that cost the government £25bn last year”.
It quoted “a source close to Hammond” as saying pension tax relief was “what is being talked about. What else is there? There isn’t much else. What else can you do? He’s not going to compromise the government’s reputation on fiscal integrity and we’re not going to be borrowing more. That’s very clear.”
‘Risk of undermining savings framework’
But Steven Cameron, director of pensions at Aegon, was among the skeptics, who noted that any savings the UK Government made now through changes to pension tax relief will have a knock-on effect on the future, as fewer people will be able to meet the costs of their own retirements down the road.
“In the face of a U-turn on [National Insurance], the Chancellor may view pension tax relief as a soft target to balance the government books,” he noted, but while this might “paper over a crack”, it would risk “undermining the country’s long-term savings framework”.
“Barely a week goes by without reports of the increasing strain being placed on our social care system,” he added.
“If there’s limited incentive to save for old age, the government will find that a saving now will be met with bigger costs later, as fewer and fewer people are able to meet these costs themselves.
“The lifetime allowance for pensions has already been reduced to such a level that many middle income earners are likely to reach the savings limit, and effectively be penalised for taking responsibility for their futures.
“While not everyone understands pensions tax relief, it’s important people take note of any discussion on possible changes as any cut could have just as much impact their finances, if not more, as a tax rise.”