It used to be that a budget would perhaps trouble only smokers and drinkers with a few extra pence on a packet of fags or a pint. This has all changed and the stakes are now much, much higher.
The budget coming at the end of this month has already been hugely damaging — and the red box hasn’t even been opened yet. If reports that Rachel Reeves is plotting a stealth tax grab on our pensions are true, this next budget could be truly ruinous.
At the times of writing, the chancellor is poised to launch a sly tax grab on salary sacrifice pension contributions by limiting tax relief on national insurance to the first £2,000 saved every year. This has the potential to wipe £50,000 off the retirement savings of a top earner. Talk to anyone who works in pensions and they will tell you that this is a dreadful idea.
It beggars belief that the chancellor could be considering this when we know we are not saving anywhere near enough for retirement and the state pension is growing increasingly fragile.
It’s all the more galling that this policy would hit the private sector hard and leave those with enviable gold-plated public sector pensions untouched.
If you scratch beneath the surface you’ll find that what the chancellor would really be doing is robbing private sector pensions to pay for more public sector spending, which has soared on her watch.
I wrote last week that an income tax raid, although harmful, was the only fair and transparent way of increasing taxes. Going after our pensions as well is unnecessary and excessive.
Obviously we need to pay taxes but there comes a point when enough is enough. Our money has to be spent wisely and spending cuts should always precede tax rises.
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Putting the money aside, the real damage from this new threat to our retirement is that it erodes confidence in pension saving. Just like the inheritance tax raid on unspent pensions, it risks putting off those wanting to do the right thing and prepare prudently for retirement. Why invest in a pension when you can put it in an Isa? That way at least you know that there will be no tax due when you want to spend your hard-earned money.
The Treasury confirmed only this week that it would not cut the pension tax-free cash allowance after months of speculation that a reduced limit was on the cards. Ruling this out was such a simple thing to do and it came far too late.
The government did not think it necessary to snuff out the same rumours last year. As a result, savers withdrew a record £18.08 billion in tax-free lump sums in the 2024-25 tax year — 61 per cent higher than the year before, according to the Financial Conduct Authority. If that money is not properly invested, those savers will be substantially worse off.
This is what happens when you warn of “tough decisions” ahead of a budget and then allow rumours to run riot.
The pensions industry must be tearing its hair out over the floundering and flailing we have seen in recent weeks. It has truly been an exemplary demonstration of how not to calm the nation ahead of a make-or-break budget.