As October’s Budget approaches, there are again rumors of potential changes to pension tax rules – as has been the case for nearly every fiscal event in recent memory. However, this time feels somewhat different.
The new government has drawn attention to a significant £22bn ‘black hole’ in the nation’s finances, yet has constrained its options by pledging not to raise mainstream taxes, which make up about two-thirds of total tax revenue.
With the prime minister warning of a ‘painful’ Budget, the likelihood of measures affecting other areas, such as pensions, capital gains tax, and inheritance tax, seems higher.
Tax-free lump sum
A particular rumor causing concern among some clients is the potential change to the 25% tax-free pension lump sum. The Institute for Fiscal Studies (IFS) has suggested that lowering the maximum tax-free amount from the current £268,275 to £100,000 could generate around £2 billion annually in the long term. This would also be a relatively straightforward change to implement.
However, this doesn’t take into account any protection regime. Historically, governments making similar changes have introduced protections for existing savers, which would significantly reduce the immediate financial benefit, making it a less appealing option for the government.
The 25% tax-free lump sum is also one of the most well-understood and popular pension benefits, so any change to it would likely be very unpopular.
