Budget calls for pensions rethink

Budget calls for pensions rethink

As chancellor Philip Hammond's Budget looms, speculation rises of another cut to the annual allowance for pensions tax relief.

There is also, according to the insurer, likely to be a reduction to the threshold of the annual allowance taper, decreasing from a current £150,000 to £125,000.

Article continues after advert

Pensions have been the go-to source for the government wanting to release funds for other expenses, possibly because, as Mr Hammond alluded to while speaking on a trip to Bali, "tax breaks are eye-wateringly expensive".

Another reason is the drive to stop incentivising pensioners to leave their pots untouched and use it as a means for tax-free inheritance.

It is understandable that, due to the planned additional £20.5bn funding plugged into the NHS, stagnant public sector wages and lack of Universal Credit, cuts have to be made somewhere.

Pensions then, stand out as the 'easier' option compared to attempting to raise other taxes such as VAT or income tax.

However, as there have been six separate cuts to the annual and lifetime allowance alone since 2010, this Budget could be the next step on a downward spiral for retirement.

If this is indeed the outcome later today, what does this mean for our ageing demographic and prolonged retirement?

Downward spiral of tax-incentive reductions 

Implementing a salami-slicing approach to pension tax relief creates an increasingly confusing exercise for individuals saving for retirement.

For advisers who have to keep up with policy changes as part of their day-to-day job, constant changes mean having to second guess the next move, which may prevent them from focusing on a long-term approach to retirement planning.

For individual savers, further cuts in tax relief could prevent them from saving at all. The fewer incentives available for pension saving, the less attractive they become, which could coerce a reduction in contributions and spur an epidemic of poor pensioners living out their retirement.

If individuals still decide to save for their future, they make look to pension alternatives. While this is, on the whole, better than no savings, it may lead to an influx of investment in unsuitable products to compensate the tax-incentive shortfall - for example, savers who are approaching retirement could turn to riskier funds which put their capital at risk.

Both are concerning to me, considering the current environment of high market volatility combined with prolonged retirement needs.

The government and financial services industry should be pushing for increased savings and protection of capital; not the complete opposite. It has been said a few times, but the need for quality financial advice is more prevalent than ever before.