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Treasury considers ‘pension tax raid’ to pay for Covid spending

Joanna Faith
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Joanna Faith

The government is considering a raid on retirement savings incentives to cover the cost of Covid, according to reports.

One plan under consideration is cutting the pensions lifetime allowance from £1,073,100 to £800,000 or £900,000, the Daily Telegraph understands.

The lifetime allowance is the amount that you can save in a pension over your lifetime, without being charged tax.

It was frozen at its current level at the March Budget, but with pressure on the public purse due to the Covid pandemic, sources suggest it could be slashed this Autumn as part of a “pension tax raid”.

Other interventions reportedly being considered by the Treasury include the introduction of a flat rate of pension tax relief and new taxes on employer pension contributions.

Experts say any of these measures risk causing lasting damage to the retirement prospects of ordinary savers.

Tom Selby, senior analyst at AJ Bell, said: “Given the parlous state of the UK’s finances, further speculation about the future of all areas of Government spending – including retirement savings incentives – was inevitable.

“However, all three of the pension tax reforms apparently in the Chancellor’s sights would be hugely risky, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment.

“Introducing a flat-rate of pension tax relief, an idea often touted by think-tanks, would present genuine practical challenges and would likely result in tax rises for public sector workers in defined benefit schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic.

“The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the Government increased their pension costs just as many attempt to recover from a nightmare year.”

Steven Cameron, pensions director at Aegon, said cuts to the pensions lifetime allowance “would be particularly punitive”.

“The current allowance only buys an annual guaranteed income of around £1,700 a month, which is hardly going to buy a life of luxury.”