The coronavirus pandemic has required massive government spending. In April 2021, the Telegraph reported that UK borrowing hit £300 billion – the largest deficit since the second world war.
Employment support alone, including through the Coronavirus Job Retention Scheme, has cost around £100 billion, according to BBC reports.
This hole in the public purse will need to be filled once the immediate threat of Covid-19 subsides and recent reports suggest that it is pensions that are in the chancellor’s firing line.
The Lifetime Allowance, pensions tax relief, and the treatment of employer pension contributions could all be set for changes in the autumn. Rishi Sunak will also need to wrestle with the problem of the State Pension triple lock, as average UK earning’s growth reaches 7.3%.
Here are just some of the changes we could see as the government looks to redress their pandemic overspend.
1. The Lifetime Allowance (LTA)
The LTA is a limit on the amount you can withdraw from your pension funds without being liable for a tax charge.
For the 2020/21 tax year, HMRC will charge you 55% for any amount over the limit that you take as tax-free cash. The charge for any excess taken as income is 25%.
In his March Budget, the chancellor froze the LTA at its current amount until at least 2026. Since 2018, it had been rising annually in line with the consumer price index (CPI), but it is now frozen at £1,073,100.
The freeze is set to raise £990 million for the Treasury by the 2025/26 tax year. Now, reports suggest the Chancellor might be considering further cuts to the LTA.
A drop to £800,000 or £900,000 would mark the lowest LTA since its inception in 2006.
The move would greatly increase the number of pensioners falling foul of the additional charge, generating extra revenue. But it would also penalise good investment growth and many hard-working Brits who followed government advice and built up large pension pots.
James Riley, president of the Society of Pension Professionals, told FTAdviser that “based on current annuity rates, £1 million buys a pension of just £22,500 per annum”, which means an LTA drop would capture those with considerably more modest retirement incomes than ever before.
2. Pension tax relief
Tax relief is a government incentive for paying into your pension. For every £1,000 you contribute as a basic-rate taxpayer, the cost to you is just £800, with the government topping up the rest.
As a higher- and additional-rate taxpayer, you also receive basic-rate relief but can claim back an additional 20% and 25%, respectively, through your self-assessment.
The cost of a £1,000 contribution is just £600 for a higher-rate taxpayer and just £550 for those paying the additional-rate.
Critics of the current system argue that this amounts to extra support for the wealthy. This makes it a possible, albeit risky, target for government changes.
The chancellor is reported to be considering a single rate of tax relief for all pension contributions, possibly of around 30%.
3. Tax on employer contributions
The third way in which the chancellor might opt to use pensions to claw back some of his coronavirus overspend is through employer pension contributions.
A tax on an employer’s contribution into their employees’ pension pots might be unpopular. It is also much harder to implement than an LTA reduction. This could be enough to push employer contribution changes further down Rishi Sunak’s list of priorities.
This is especially true while he still has the State Pension triple lock to contend with.
The chancellor’s triple lock conundrum
The State Pension triple lock is a commitment to inflation-proof the State Pension by guaranteeing a yearly rise equal to the highest of:
- Average earnings growth
- Annual price inflation, as measured by the CPI.
During 2020, as millions of UK workers were furloughed on 80% pay, wage growth was negative. In 2021, however, lifting restrictions and the gradual winding down of the furlough scheme have seen wages bounce back.
The Office for National Statistics has confirmed that average earnings growth was 7.3% in the three months to May 2021, and it could rise as high as 8%.
An increase of 8% will cost the Treasury but not adhering to the triple lock will mean breaking a Conservative manifesto promise. Whether the chancellor honours the party’s triple lock commitment or opts for a suspension or compromise is still to be seen.
Get in touch
The coronavirus pandemic has led to unprecedented borrowing and the government will be looking to claw back some of that money as restrictions lift and the country reopens.
At Globe IFA, our expert financial advisors can help you put long-term financial plans in place based on your dream retirement. We will then review your plans regularly to ensure that your plans remain on track, whatever outside influences affect your pension pot.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.