The 3 Most Likely Pension Changes Coming In The Upcoming Budget

Lots of people are worried about the potential tax rises that could be announced in the upcoming Budget on 30th October 2024.
The government is coming for your wealth and therefore we are all searching for hints of what might be put out.
One of the most insightful reports on this, especially when it comes to what might happen to pensions, has recently been released by LCP.
LCP are a consultancy firm, providing research in various sectors including pensions.
The report is worth taking note of because it was part authored by former Pensions Minister Sir Steve Webb.
Sir Steve Webb was a former Liberal Democrat MP and Minister for Pensions under the coalition government.
His body of work during that time includes the State Pension ‘Triple Lock’, the introduction of workplace auto-enrolment pensions and ‘Pension Freedoms’.
The man knows his stuff, has been at the heart of government in terms of pensions and can provide great insights into their long-term thinking.
This is why we should take note when he suggests what the government could be planning to do.
In the introduction of LCP’s Pensions, Tax and the Budget report there is a really interesting table that outlines how much the current pension tax relief system costs the government.
The combined cost of Income Tax relief on employee, employer, self-employed pension contributions and investment returns of pension funds comes to £46.8bn.
On top of this employers currently get National Insurance relief on employer pension contributions and this costs an additional £23.8bn. We will come back to this shortly.
The report has deducted the amount of Income Tax and other tax charges that come from pensions in payment bringing the total net cost of pension tax relief to £48.7bn.
Looking at the size of these numbers you can see why the government might be so keen to tweak the pension system to find extra tax revenue.
Having ruled out increases to Income Tax, National Insurance and VAT which make around two thirds of all tax revenues, the report believes there is not much else the government can do apart from attack pensions.
One of the big rumours that has been swirling around is the idea of a flat rate of tax relief. So rather than higher rate taxpayers getting full tax relief on pension contributions they could potentially lose out by only getting basic rate tax relief for example.
LCP do not believe a flat rate of tax relief is likely as they believe it would be complex to implement, create millions of ‘losers’ including many people working in the public sector and is effectively increasing taxes on working people. Something the government have previously said they will not do.
We have also seen in the last few days reports of Chancellor Rachel Reeves planning to drop this idea due to the impact on the public sector.
The LCP report identifies three changes to the pension system that they believe are most likely based on the following criteria:
• The change would generate significant revenue for the government.
• It would primarily impact the wealthier.
• It could be implemented quickly.
• Does not disincentivise investing for retirement.
#1 - Reducing the pension tax free lump sum
#2 - Employer National Insurance contributions on employer pension contributions
#3 - Taxing pension death benefits
If the government really is serious about raising funds, then it does look likely that something has to change on pensions due to the size of the numbers involved.
The three changes outlined above seem to offer the government the best of way of doing this with some form of employer National Insurance of employer pension contributions the most obvious.
Of course, we still don’t know what’s going to happen for sure. At the moment the government seem to be rowing back on a lot of proposed changes once they hear about the political fallout.
Nowadays most politicians are weak and only interested in maintaining votes and their seat at the next election so part of me thinks they will dial everything down and make tweaks here and there.
The other part of me says that if they were going to do something drastic, now is the time to do it with it being their first Budget over a five-year term. So, plenty of time to deal with the fall out and generate more positive news.
In terms of what you should do, I would not be making any rash decisions. Only carry out the plans you were originally going to do anyway, regardless of the Budget.
Remember, any retirement plan should have the long term in mind so think about how your actions will impact the long term, not the short term.
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