A review of pensions allowances, the triple lock and a possible change in the state pension age are all expected to be on the chancellor’s list in the Spring Budget next week.
Chancellor Jeremy Hunt will deliver the UK’s fourth fiscal statement in 12 months on Wednesday (March 15).
The Institute for Fiscal Studies has calculated that the chancellor might have an additional £30bn in headroom due to a fall in energy prices, lower interest rate expectations leading to smaller borrowing costs and tax revenues coming in above estimates.
However, sweeping tax cuts remain unlikely, said Laith Khalaf, head of investment analysis at AJ Bell.
“All eyes will be focused on any small gratification that may emerge from Hunt’s red box,” he said.
It wouldn’t be a Budget if there weren’t some speculation around the future of the pension tax system, said Dean Butler, managing director, Standard Life.
So what changes could be in the chancellor’s sights to help the UK public?
MPAA
The money purchase annual allowance (MPAA) has been said to penalise people who either return to the workforce or attempt to replenish savings having used the pension freedoms as designed.
The MPAA reduces the annual allowance for those who have flexibly accessed taxable income from their retirement pot by £36,000, to £4,000.
A joint industry letter signed by AJ Bell and organised by the Lang Cat was sent to the Treasury last week warning that this penalty is a “clear disincentive” for people who want to return to work and keep saving for retirement.
“It also risks hindering those who have accessed their pension during a period of financial distress from rebuilding their pot afterwards,” Tom Selby, head of retirement policy at AJ Bell, said.
The letter suggested a change in the MPAA to £10,000.
However Butler said an increase in the limit may help but its benefit will be limited to those on relatively large incomes.
“Bigger questions have been raised as to whether it’s really health issues, or some people’s relatively good financial position that are keeping older people out of the workforce," he said.
Lifetime allowance
Another area that may be discouraging some people from continuing to work is the pensions lifetime allowance.
This has also been touted as a probable change in the budget.
The annual and lifetime pension allowances, which stand at £40,000 and £1.073mn respectively, are caps on how much someone can contribute into their pension while still benefiting from tax relief each year.
The lifetime allowance is seen as a reason for some NHS workers leaving the industry.
Research by Wesleyan last year showed that a fifth of NHS doctors, nurses and senior staff had or planned to leave the NHS pension scheme permanently in a bid to avoid tax charges, while a further fifth (19 per cent) had or planned to strategically leave and re-join the scheme in an attempt to limit their pension growth.
