The Budget Breakdown - Episode 3

In this episode, Mark Morton dives into why pensions are once again in the government’s crosshairs ahead of the November 2025 Budget. From tax-free lump sums to lifetime allowances and relief reform, Mark unpacks how these changes could hit savers and why the Treasury can’t resist eyeing that £50 billion of tax relief tied up in pensions.

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Transcript

Mark Morton: 0:02

Hello everybody, it's Mark Morton here, latest in the series of these little podcasts leading up to the budget. Really looking at that statement that the Chancellor started off with a year or so ago, that she, after raising lots of taxes, would not be coming back with more borrowing or more taxes. And of course, as we lead up to the second of her budgets, it appears that one stroke, both of those are going to happen. The thing I was going to focus on today was pensions. If you go back a year to the previous budget, there was a lot of comment on pensions and the restrictions of tax relief somehow, somewhere leading up to the previous budget. I would say as an individual, I made a decision myself to trigger my tax-free lump sum prior to the last budget. I would like to emphasise to everybody out there, if there is anybody out there, I was not talking about 268,000 quid. But when you saw the messaging before the last budget, my concern was that if I look at myself, I don't need my pension today. I could draw it today as a private pension. I don't particularly need it or want it at the moment. To me, the 268,000 tax-free lump sum is not going to go up in this parliament. The messaging was that it may well go down ultimately. And so I made a personal decision to trigger my lump sum whilst it was within that 268,000 quid, and hence I knew it was tax-free. Similar messaging has been coming out of the exchequer. So again, you are sorting to see clients saying, Should I do it? Should I not? What that has led to is a couple of statements from the revenue ultimately saying if you took it out and then the chancellor didn't change the rules, there were a number of people who were then trying to use the sort of financial cooling off periods to go back and say, I've got 28 days to put it back in again. And the basic idea is the revenue don't agree with that, as you might expect, but it prompted behaviour. And I think if you look, if you look at what was going on before the last budget, there was a lot of pressure on financial advisors trying to do, you know, trying to trigger tax effects with pensions whilst people knew what the rules were, because ultimately, of course, something was coming. Now, of course, the something that actually came was essentially putting private pension funds into the IHT net. I've talked about this before, that frankly, you know, it's a private pension issue, not a public service pension issue primarily. It takes away the incentive to save. I suspect probably what you've seen from some of your own and managed clients is that their inclination to put into pensions now has diminished. If you look at the other side of it, you know, billions and billions, depends which figure you read, but tens of billions of pounds have been withdrawn from pensions since the last budget, which is part of the fear factor which dripping things through out the press creates. Now, the reason that pensions always get talked about when governments need money is current, I say current, we get an annual set of figures on how much income tax and NI relief, if you want to call it that, on personal pension contributions cost the exchequer. The last figures that we had were for 22.3, which isn't that recent, but uh it's what you get when the Office of National Statistics staff work from home, I suspect, but there we go. Cost the government gross about 70 billion quid. Now, when you bear in mind that the defence budget this year is only 83 billion, that is a vast amount of money, ultimately. Now, on the reverse side of that, when you draw your private pension, having had tax relief on some of that contribution, then you pay income tax on it generally. So that raises about 20 billion. So if you net it off, tax on personal pension contributions or tax relief is costing the exchequer broadly about 50 billion a year, which again is a vast amount of money. So you start to say, could we tinker with bits of this system? You could reduce the tax-free lump sum from £268,000, which I suggest most working people, if anybody actually knows what a working person is, but most working people through their nest auto-enrollment savings will never get a sniff of. You could reduce that to 50 grand, and most people wouldn't be affected. Now, clearly, some people would, but I don't think that would be a massive vote loser ultimately, because it wouldn't affect that many people. The flip side is how much money would it raise ultimately? If you look at other aspects of the pension system, again, I think a similar theme. Annual allowance used to be 40 grand. 40 grand for most working people is a figure they're never going to achieve as a combination of employee and employer contribution. Went up to 60,000 quid primarily to help doctors. 60,000 quid of public money, notional value of contribution, which is a you know huge amount. You could put it back down to 20,000 quid, and most people would not be affected by that. Now, clearly, some people would, but then at the end of the day, if you're going to raise tax, you're going to upset some people. And you could raise some money if you reduce the annual allowance. You look at the ultimate value of you know the lifetime allowance as was a punishment on excess over a set figure to reflect the fact that you had a lot of tax relief on the way in and you've ended up with a massive pension pot. So raise an extra charge at the other end, I think could be a possibility. Other things with this, you could reduce that lifetime allowance, which is a different way of doing it, but it only really works, I suppose, ultimately if you have a charge on the excess. I think the other thing that you could seriously think about, and I this is not whether I agree with any of these things or not, but you are all old enough to understand, and if you've ever watched Yes Minister, you will know this to be true. The way you ask the question dictates the answer. So I think you could ultimately sell to the general public it is not right that the government, the more you have, the more it funds in terms of income tax relief your personal pension contributions. You know, what we're gonna do is limit personal pension contributions to 20%, for example, and that would raise a lot of money, ultimately. So uh pensions get talked about because there's so many aspects where you look at it, and the government could change all sorts of things, and it would raise significant amounts of money depending on which one you go for. It's also, I think, mirrored or covered by the fact that the majority of people don't really understand pensions, they don't really understand the impact of this change, and the impact may be 20 years down the line, you know, they tend to forget quite quickly. So there's a lot of stuff with pensions. I think the other thing that does strike me, a lot of foreign countries do not give tax relief on pension contributions. So you put your money in a secure pot, tax-free environment like it now is, it would have rules about investment and it would have rules about not being able to draw it until you're 57 or whatever it may be. But fundamentally it grows in that tax-free environment. But when it then you hit your retirement age, it's your money. You don't need 25 cent tax-free lump sum because the whole lot's tax-free. Now, in my simple mind, if you turned our system on its head and said we give no tax relief whatsoever up front, but there's no tax on the way out, that would, in my simple mind, seem to save you 50 billion quid, which seems to seem a lot of money, which would be then clearly very wisely spent by the government again. But all I'm trying to get at, this is why pensions get talked about, that there is just a vast amount of money wrapped up in terms of tax relief within the system, and hence it is something governments always look at, which then explains why a lot of clients are jumping up and down trying to do things before November, the 26th, obviously. Anyway, we shall see. I know no more than you about these things, but you can start to understand why governments are talking about some things and not others. Okay, take care, and I may bump into you again on the next of these little series of podcasts. Thank you for listening to the Mercia Podcast. For more information on this topic, please visit mercia-group.com.