The government’s reform of the way it awards tax relief on pension contributions has been the star among Budget predictions in recent months.
However, a sudden turn of events last weekend pretty much ruled the measure out. A Treasury source told the BBC it was “not the right time” to make changes.
So what’s left?
1. Annual Allowance (shock horror)
Pension savers’ annual allowance could be on the chopping block, after all the Chancellor wants to curb the expense of his tax relief budget – currently stood at about £35bn.
Annual allowance (AA) is the amount savers can put away tax-free every year.
It currently stands at £40,000, having been cut from £50,000, and down from £255,000 in 2011.
The sum may seem high, however for higher earners, those who have left their pension funding until late in their careers and for older members of final salary pension schemes, this is already an uncomfortably low ceiling, said Hargreaves Lansdown head of retirement policy Tom McPhail.
Old Mutual said a reduced annual allowance of £30,000 could happen. The provider said any lower than that will have a bigger impact on defined benefit scheme accruals for average earners with long service who get promotions, which would again open the Chancellor up to criticism ahead of the referendum.
Taper tantrum
It also said there was extended scope for tapering the annual allowance.
“This could be adjusted to income levels of £100,000 instead of the £150,000 currently proposed – which would reduce input for higher income levels and reduce the funding capacity for more top-end higher rate taxpayers,” it said.
2. Lifetime allowance (widely hated)
Similarly to the AA, the lifetime allowance (LTA) could also face further cutbacks. The LTA was already reduced in last year’s Budget – from £1.25m to £1m – after being cut from £1.8m in 2011.
Many in the pensions industry have called for it to be scrapped altogether, however, the Treasury has found this a useful mechanism for progressively restricting the overall amount investors can build up in their pensions, McPhail commented.
Yorsipp national head of business development Mark Canning also wants the LTA to become a thing of the past.
3. Pensions dashboard (too complex?)
Previously confirmed as a point of discussion by the Financial Conduct Authority, a dashboard for pension savers where they can see all their savings in one place, could be on the cards.
The idea was also given official support in this week’s Financial Advice Market Review.
Consumer champion Which? said it wants the government to use the Budget to announce plans for a dashboard alongside a clear timetable for its implementation, after it found almost half of over 50s do not know the value of their pension.
However, pensions minister Ros Altmann has already come out to say any swift implementation was unlikely as the industry was not ready. Scottish Widows agreed.
4. National Insurance and income tax merger (Budget bombshell?)
The Office for Tax Simplification (OTS) is currently looking at the possibility of a merger between income tax and National Insurance.
Old Mutual Wealth pension technical expert Jon Greer said: “The OTS has concluded that the current structure of National Insurance contributions is ‘no longer fit for purpose’ and doesn’t support the UK’s flexible workforce model.
“It seems likely that that the government will initiate a programme of reform.
“With major changes to pension tax relief put on hold, we anticipate there is scope for George Osborne to give the green light for an overhaul of national insurance at next week’s Budget.
“Arguably the biggest change to personal taxation in a generation, this would be highly complex, with wide-ranging impacts on across pensions and employee benefits and significant changes to payroll systems.”
5. IHT residence nil rate band (it’s complicated)
The government confirmed last year it would introduce a new inheritance tax (IHT) nil rate band on the primary home.
Old Mutual Wealth financial planning expert Rachael Griffin explained it means that a couple will eventually be able to pass on up to £1m free of IHT.
However, she added: “The proposals are complicated. Assets must pass on directly to descendants, and there are convoluted calculations that dictate how the allowance is to be applied property is sold or homeowners downsize in retirement.”
She said Osborne could use Wednesday’s speech to simplify the rules or replace them altogether through as increase in the nil rate band which has remained unchanged since 2009.
Brewin Dolphin said: “Given the Chancellor is short of money, he may be forced to revisit previous pledges on IHT.
“Fiscal worries could mean that the amount of relief actually given is reduced, or spread over a longer introduction period to limit the cost to the Treasury.
“While a million is a large headline number, the joint allowance refers to property only and not the entire estate. The UK has over 600,000 properties worth over £1m and even modest property price inflation may tip more into this bracket.
“Many more people than before will find themselves needing estate planning and we urge those to seek advice now.”
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