Chancellor George Osborne will have to play his cards very carefully when laying out his hand for Budget 2014.
While Prime Minister David Cameron and his Lib-Dem deputy Nick Clegg are hinging at tax cuts to prime voters for the upcoming general election in May 2015, Osborne is struggling to close a rumoured £20 billion hole in public finances.
The options are clear – either find some money from somewhere to reward voters who have had to cope with years of cuts and austerity or come clean and admit the economy is still overspending and find more savings.
For retirement savers, one expected change in Budget 2014 could be relaxing the rules on commuting small pot pensions.
That would allow investors with no more than £10,000 in a pension to drawdown the whole amount in cash. The current limit is just £2,000.
Small pot pension relief
Although speculation is rife about the change, the details are unclear – for instance would the whole sum be tax-free or would investors only be allowed to take 25% tax-free and then pay income tax on the balance of their fund?
It’s likely that savers with more than one small pot fund would have their schemes pooled so they could not take several cash pots without paying tax.
Industry experts commenting on the move suggest that changing the small pot commutation limit would affect around 150,000 pension savers a year.
Instead of taking their cash, these investors have to by an annuity with the balance of their fund which pays just a few pounds a month. The cost of buying the annuity also diminishes the value of their pots and decreases the income earned for the annuity.
Fragile economy
Osborne’s spending deficit problem was revealed in the Financial Times after analysis of figures from the Office of Budget Responsibility.
The £20 billion comes from the difference between what the office calculates as the real deficit of £111 billion and adjusted figures put forward by statisticians and economists of around £80 million.
The chancellor was heavily criticised when making his autumn statement last year about overshooting dates when public borrowing and spending would fall inside predicted limits.
Despite ongoing problems with a fragile economy, growth in Britain is exceeding the rest of Europe and businesses are creating jobs.
The Chancellor is scheduled to make his Budget 2014 speech on March 19.
