Speculation is intensifying around potential major reforms to the UK pension system, with experts warning that valuable tax reliefs could be significantly reduced or restructured in the upcoming Autumn Budget.
The 'Supertax' Threat to Pension Savers
Financial analysts are raising alarms about reports that the government may target pension tax relief, particularly for higher-rate taxpayers. One proposal under consideration could see the 40 percent tax relief on pension contributions axed, effectively creating a 'supertax' that would cause serious issues for pension savers.
Nishi Patel, managing director at accountancy firm N-Accounting, commented on the current system: "I don't think the tax benefits on pensions are too generous, however the freedom of investment definitely is. Why should I be getting UK tax relief on my investments when most of them aren't in the UK?"
Mr Patel suggested the government should steer investment into British shares and Government bonds rather than allowing tax relief for non-domestic products.
How Pension Tax Relief Currently Works
Under existing rules, savers receive tax relief on pension contributions matching their marginal income tax rate. This means:
- Basic 20% rate taxpayers get 20% relief
- For every £80 paid in, the government adds £20
- This effectively means £100 goes into the pension pot
The potential changes could disrupt this long-standing system, particularly affecting those who benefit from higher-rate relief.
Confirmed Changes: Inheritance Tax on Pensions
While speculation continues about potential reforms, one significant change has already been confirmed. Chancellor Rachel Reeves announced in the Autumn Budget 2024 that pensions will become subject to inheritance tax from April 2027.
Although specific implementation details remain unclear, a previous government consultation outlined that most unused pension funds and death benefits will be included within the value of a person's estate for inheritance tax purposes.
Mark Plewes, head of Pensions Technical at WBR Group, expressed concerns about the ambitious timetable: "The timetable is ambitious, and there are still unanswered questions about how the rules will work in practice, particularly around valuations, reporting, and payment deadlines. If these complexities aren't resolved, a delay would be sensible to avoid chaos for personal representatives and pension providers."
Urgent Planning Advice for Savers
Mr Plewes strongly advised people who might be affected by the new inheritance tax rules to take immediate action. "If you have a significant pension pot and other assets, it's vital to review your estate planning now," he warned.
Recommended steps include:
- Updating your will
- Revisiting expression of wishes forms
- Considering lifetime gifting strategies
- Exploring life assurance to cover potential tax liabilities
The expert emphasised that professional advice is essential to balance inheritance tax exposure with retirement income needs, noting that acting early provides more options and prevents rushed decisions later.
As the Autumn Budget approaches, pension savers are advised to monitor developments closely and consider seeking professional financial advice to navigate the potential changes effectively.
