The changes being considered by Chancellor Rachel Reeves are believed to include the amount of tax-free cash people can withdraw from their pensions, as well as changes to the inheritance tax treatment of their retirement savings.
It is also understood that the Government is considering introducing National Insurance on employer pension contributions.
It comes after a rumoured introduction of a flat rate of tax relief appears to have been shelved amid concerns about the impact it would have on public sector workers.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “The rumour mill has been running red hot in recent weeks, with speculation of major changes to pensions.
“Thankfully, one of the more persistent rumours – the introduction of a flat rate of tax relief – appear[s] to have been shelved last week, following concerns of the impact it would have on public sector workers.”
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Moving to a single flat rate of tax relief could potentially significantly increase the tax bill for public sector workers.
Pension changes being considered
There are still other options still on the table that could affect pension planning.
Perhaps some of the most substantial speculation surrounds a potential reduction of the amount of tax-free cash people can take.
It is understood that the Labour Government is considering slashing this amount that pensioners can take from their savings pots.
These savers can currently withdraw 25% of their nest egg tax-free, up to a limit of £268,275.
The limit of £286,275 had been reduced by the previous Government.
Morrissey added: “This rumour has caused a lot of concern, with people looking to take their tax-free cash now – a move that could have huge impacts on their retirement.”
She explained that taking money out of a pension now potentially deprives it of future investment growth.
It could also subject it to a whole host of taxes that it might otherwise have avoided, such as inheritance, capital gains, dividend and income tax.
“We could also see people try to reinvest surplus tax-free cash they’ve taken back into their SIPP and potentially fall foul of recycling rules that clobber them with a fine,” Morrissey said.
“Even if the money is put in a bank account, there is a huge risk its purchasing power is eroded over time by falling interest rates.
“This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging.”
She continued: “People need certainty to make long-term plans and they just don’t have that right now.
“The sooner changes such as raiding tax-free cash, can be ruled out, the more people can focus on the long term again.”
Employer National Insurance
Levying employer National Insurance contributions (NICs) on pensions is also rumoured.
Money that goes into a pension is currently free from income tax and National Insurance.
However, the Chancellor could decide in the Autumn Statement to make employers pay some National Insurance on the money they put into workers’ pensions
Morrissey suggested that such a move “will push up costs and could impact pension contributions”.
Employers currently pay NICs of 13.8% on all earnings above £175 per week, but pension contributions are exempt.
Morrissey explained: “This is a nice incentive for employers, which looks to be firmly in the Chancellor’s sights.
“However, such a move does not come without drawbacks – it would, of course, push up employer costs and the concern is that they could look to recoup this cash either in the form of smaller pay rises or a refusal to increase their pension contributions – both of which spell bad news for people’s financial resilience.
“Given the ongoing debate around adequacy and how we can help people better prepare for retirement, this could be something of a backward step.”
Inheritance tax treatment of pensions
Another potential target for the Chancellor is the inheritance tax treatment of pensions.
Inheritance tax is paid if an estate is valued at more than £325,000, but any money saved in a pension does not count towards this.
Indeed, in most cases, a pension is currently treated as being outside of a person’s estate for inheritance tax purposes.
This sets it apart from individual savings accounts (ISAs) and can lead to people running down other savings in retirement before touching their pension, which can then be passed on to loved ones.
Making pensions subject to inheritance tax could potentially raise a significant amount of money for the Government and incentivise people to spend their pension pot during their lifetime.
Morrissey suggested: “We could see people opting to give away more gifts in their lifetime to family as a means of mitigating this tax, which could play a huge role in helping younger people get onto the property ladder.”