With a mountain of debt and an economy still on its knees, what are the chancellor’s options when he makes his Budget speech next week? Are pensions the low-hanging fruit or will they not even feature? 

 

The focus of next Wednesday's Budget might well lie on the recovery and fresh attempts to deploy national savings to finance this. But with the sheer scale of the sums spent on tying businesses and individuals over for the duration of the pandemic – public borrowing is at a peacetime record of about £350bn – and potentially lower tax receipts in 2020/21, tax rises may not be off limits. 

 

Chancellor of the exchequer Rishi Sunak has previously been trying to gently prepare the public for future tax increases; after all, the UK economy is battling not just Covid, but simultaneously adjusting to Brexit and the move to net zero, the Institute for Fiscal studies has warned. 

 

 

Whenever speculation about pensions tax relief arose in the past, the Treasury has tended to refer to the outcome of a 2015 consultation on tax reform, which it said shows no agreement on the issue in the industry. 

 

However, independent consultant Malcolm McLean said the cost of pension tax relief, together with the state of government coffers, mean it “may be too tempting a target for the chancellor to resist” this time. 

 

The bill for net pensions tax relief alone stood at £21.6bn this tax year or 0.95% of GDP, and another £18.7bn or 0.83% of GDP was given in national insurance contributions relief on employer pension contributions, HMRC documents show, making it one of the bigger tax reliefs the state offers, but also one that has remained broadly flat as a percentage of GDP since a fall in 2016/17, after new allowances were introduced to limit how much can be saved. 

 

McLean hopes that any immediate cuts would be accompanied by a commitment to carry out a more fundamental review of the whole system of pension reliefs and allowances, “which many of us believe is now creaking at the seams”.  

 

HMRC is due to publish a list of all new and existing tax reliefs with their objectives in the autumn and specify the objectives of each, after the Public Accounts Committee said tax reliefs and their impact were poorly understood. 

 

It also said that “HMRC and HM Treasury are insufficiently curious about the impact of some key tax reliefs on different groups". One of its recommendations is that HMRC should publish data showing who is benefiting, split by income and groups with protected characteristics, public versus private sector and people in defined contribution and defined benefit schemes. HMRC is due to do so by December. 

 

What is clear is that pensions tax relief is by many perceived as complex and suboptimal. The Association of Consulting Actuaries has found that four-fifths (79%) of employers say the complex pensions tax regime is negatively impacting their business; 89% say it needs simplifying even if that means some people are worse off. 

 

 

Aside from tax relief, the chancellor also has the annual and lifetime allowances to play with. McLean said he would in particular like to see some relaxation on the money purchase annual allowance, “to allow those people who have found it necessary to raid their funds prematurely to make good some or all of their saving deficits before retiring”. Figures from January show that 360,000 people withdrew from their pensions in the last three months of 2020, a 10% increase from the same quarter of the previous year. 

 

Overall, he hopes that pensions will not see many negative changes. This could be possible because “the chancellor may take the view that the pandemic has still some distance to run before the country gets back to anything like normal and now is not the time to rock the boat with a hit on pensions and people’s savings plans”. 

 

 

But, in the context of pandemic borrowing, pensions tax relief could indeed be seen as low hanging fruit, agreed Ruth Bamforth, a director at law firm Walker Morris.  

 

Any such change would require considerable adjustment, she warned, with numerous questions on how to apply this in practice. “I would hope it wouldn’t come in immediately, just because of the changes that would be required to implement it, in administration but also the legal changes would be quite complicated,” she observed. 

 

While other taxes might be less difficult to change in practice, “it might be an easier sell to do something on pensions tax”, she added. “I wonder whether this year could be the year of some announcement, even if it is only coming in next year.” 

 

There are also questions about reforming auto-enrolment, as the previous government said it would implement the recommendations by the Automatic Enrolment Review in the mid-2020s, but Bamforth said she expects thresholds to remain unchanged, despite widespread support for contributing from age 18 and the first pound earned. However, she said that “bearing in mind that personal finances at the moment for some people are quite strained, it’s a delicate balance to do something that might [bring people to] opt out”. 

 

 

Others are of the view that it is too early for the chancellor to want to inflict any pain to bring public finances on a more even keel. “I suspect that the chancellor will not want to rock the boat too much while we are still in the midst of the storm, and so I think we are still at least a year or two away from major reforms in this area,” said Tim Smith, a professional support lawyer at Herbert Smith Freehills. 

 

For the same reason, he does not expect any changes to the triple lock, “despite the prospect of significant increases to state pensions in 2022/23 as wages artificially rebound during the course of this year due to the unwinding of the Coronavirus Job Retention Scheme”, he said. 

 

What we might however see – given that COP26 is taking place in Glasgow this November – is a plan for the government to issue its first ever green bonds in 2021. “This will be welcomed by pension funds, asset managers and insurers that are looking to display their ESG credentials,” noted Smith. 

 

There could also be some news about the shape of a post-Brexit economy and the government’s ‘levelling up’ agenda, which could include proposals to upgrade UK financial services regulation to make the UK a world leader in green finance and fintech and the reintroduction of low tax or tax-free ‘free ports’, he noted, which “could lead to some significant new investment opportunities in the coming years”. 

 

 

The pandemic has also put the spotlight on a struggling care sector, and the government under pressure to be seen to do something. Whilst not directly related to pensions, the question of how to finance care in old age has repeatedly led to suggestions to link it with pension saving. 

 

Among others, the ACA has called for an integrated savings, pensions and care policy, saying that “the government needs to ‘be brave’ and make proposals this year on what it feels the appropriate burden of cost for providing social care, split between the taxpayer and the individual, should be”.  

 

This could include ideas such as “consideration of tax reforms whereby pension income used to pay for care is tax-free, purchase of care insurance products is incentivised and/or a social insurance scheme is put in place that might help younger people better to plan ahead than the present older generations have been able”. Its recent survey found that 60% of respondents support tax changes to encourage greater self-funding through private pension provision.