Scrapping the tax-free lump sum, slashing higher rate tax-relief or putting a stop to salary sacrifice pension contributions: all these policies should be unthinkable for a nation that is hurtling towards a retirement crisis.
Yet those are the ideas that many in the pensions industry fear are being considered in the corridors of power ahead of the Labour government’s second budget. And while we face the threat of more taxes on retirement savings, eyewatering spending on the state pension benefit is continuing unabated.
Britain has a spending problem. It cannot wean itself off the triple-lock pledge, which guarantees that the state pension goes up in line with earnings, inflation or 2.5 per cent, whichever is highest. In the 2029-30 financial year it is expected to cost £15.5 billion, three times more than was predicted when the guarantee was introduced in 2010. The triple lock is on course to bankrupt the state pension in little over a decade.
• We cannot afford generous pension rises as a matter of routine
However, no leading political party will admit this and commit to putting a stop to it — something that would be entirely reasonable given the bleak state of the economy.
Instead, as we inch closer to the budget on November 26, calls to increase taxes on pensioners are growing louder and louder. This week, the Resolution Foundation, a think tank focused on improving living standards for those on middle incomes, urged the chancellor, Rachel Reeves, to cut national insurance by 2p and increase income tax by the same amount. This would essentially be a roundabout tax raid on the over-66s who do not pay national insurance on income.
It also does not bode well that the Treasury minister helping to lead budget preparations is Torsten Bell, who headed up the Resolution Foundation up until last year when he became a Labour MP.
In his think tank role, Bell called for cuts to pensions tax relief for higher earners and reductions to the tax-free lump sum limit. He also advocated for the triple lock to be ditched, but, now that he is in power, he has said that it will stay — at least until the end of this parliament.
The chancellor herself, as a rising star of the Labour party, said that the one thing she’d fix about the tax system was the higher rate of pension tax relief, which she described as a “savings subsidy for higher earners”.
Regardless of what Reeves does in the budget, spending on the state pension will continue unfettered to hit nearly £150 billion by the end of the decade. The money has to come from somewhere, and ironically it could well be sapped from the private savings of those pensioners who have saved hard to provide themselves with a well-earned, comfortable retirement. This despite an estimated 15 million of us not saving enough for retirement, according to the government’s own figures.
The government will be exploring every nook and cranny in its attempt to plug Britain’s multibillion-pound black hole. Asking overtaxed younger workers to pay more tax to keep the triple lock is a non-starter, so it becomes clear that retirement savings and pensioner wealth could prove irresistible to Treasury civil servants and their spreadsheets.
• State pension to rise by inflation-busting 4.7% under triple lock
There is more than £3 trillion sitting in UK pension assets. Tax breaks to promote better retirement savings habits are said to cost the government billions of pounds a year. It’s also estimated that once property and pension wealth are added up, about one in four pensioners are millionaires.
Reeves reportedly wants one of the budget buzzwords to be “contribution”. You could be forgiven for thinking that this suggests she will be asking more of us to cough up. But she has already promised not to increase taxes for “working people”. This leaves retired workers in the frame.
The chancellor would be wise to consider that with every pension policy tweak, retirement plans years in the making are thrown up in the air. We also cannot forget that pensioners are already paying much more tax than they ever have.
There’s a good chance that the Treasury will fail to heed any warnings, though. Take the inheritance tax raid on pensions due to come into force in April 2027. The industry has repeatedly warned the government that it will create a bureaucratic nightmare for grieving families who face effective tax rates of more than 90 per cent once income tax is added. Ministers are forging ahead nonetheless.
The government needs to reassure us that saving for our own retirement is not only the right thing to do, but that it pays to do it.
I truly hope that I am wrong and that pensions are left well alone in the budget. This government is at a critical crossroads; the chancellor says she wants to spark growth but may not be able to resist the temptation to tax.
Keeping our pension tax breaks in place is the only way to ensure that we can one day break free of the triple lock.