Pensions are one of the government spending categories that have a lot of noughts on the end, so stand out as a target for Chancellor Phillip Hammond and his Autumn Budget 2017.
Previous chancellors have found tweaking pension reliefs and allowances too much of a temptation when they are looking for extra cash to shore up the deficit.
Unfortunately, Hammond may think the same.
So how might he change pension rules to save money on November 22?
Two big pension numbers are tax relief on contributions, which cost the Treasury around £3 billion last year and National Insurance Contributions reductions on employer payments towards workplace pensions. This cost the Treasury around £2 billion.
Chancellor’s targets?
If Hammond lowers pension allowances, savers cannot put aside so much money, so he reduces the amount of money the government gives back to retirement savers.
Here are the likely targets:
- Annual allowance – Retirement savers earning less than £150,000 can contribute up to £40,000 a year into their pensions and pick up tax relief at their marginal rate. Reducing the cap or changing the rate of relief is a logical saving.
- Tapered allowance for high earners – Anyone lucky enough to earn £150,000 a year loses 50p of their annual allowance for every £1 they earn over the limit until their allowance drops to £10,000. The chancellor could decrease the allowance to £100,000 or adjust the taper amount up from 50p.
- Lifetime allowance (LTA) – Not much wriggle room here. George Osborne throttled the LTA down to £1 million and introduced an annual increase in line with inflation – currently 3% in April 2018. For many mid-earners and above, a £1m pot is a tight limit.
- Axing carry back/carry forward – The rules allow savers to take unused allowances from one year to increase the money they put into their pension. Scrapping these would only hit the wealthiest pension savers.
Punishing the rich
The Chancellor knows few ordinary voters care much about savings limits for the highest earners, so whatever he does that does not impact ordinary families is likely to pass without upsetting too many people.
That confines the likely tinkering to the annual allowance and carry back/carry forward rules.
“Since 2010, the Treasury has form for raiding pension tax relief almost every year. With pressure to spend more, especially on young people, and with revenue shortfalls from a stuttering economy, a politically weakened Chancellor is likely to turn again to tax relief as a source of less politically challenging revenue raising,” said former pension minister Steve Webb.
