It is thought the chancellor could drop plans for changes to pension tax in the upcoming Budget, with experts calling speculation over any changes “damaging”.
An article in The Times claims Rachel Reeves has been told by senior treasury officials that reducing the current 40 per cent level of tax relief on higher earners would disproportionately hit those of relatively modest incomes who work for the state.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “This ongoing speculation about changes to tax-free cash is damaging. The chancellor has recognised that businesses need certainty in the taxation environment to make investment decisions.
“The same is true of our personal finances. The government has left people to make impossible decisions about their investments and pensions.
"The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.”
She said though the complex idea of a flat rate of tax relief on pensions appears to have been dropped, there are other options on the table for the government, including reducing the amount of tax-free cash people can take from their pensions.
Morrissey said changes to restrict tax free lump sums further would prove unpopular and said clarity was needed.
She added: “ Ripping money out of a pension now potentially deprives it of future investment growth and leaves it subject to tax. There’s also the possibility it could be placed in a low interest bank account where its purchasing power gets eaten away by inflation over time.”
Mike Ambery, retirement savings director at Standard Life, said there would be two major challenges to implement changes to income tax relief.
He said: “Firstly, they would by highly complex to implement and secondly, they come with political downsides given their knock on implications for public sector workers in particular.
"The chancellor will be assessing many ways of raising revenues and whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached.
“Pensions are long term by their nature and ideally any changes would be considered as part of the government’s upcoming pension and adequacy review, so that the different aspects of pensions system could be viewed in the round but clearly there is some pressure on the nation’s finances in the short term which may make this a challenge.”
Last week, analysis published by LCP looked at the potential for changes on pension tax relief as part of the Budget on October 30.
tara.o'connor@ft.com
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