Budget 2024 Preview: What's in Store For Pensions and Taxes?

Because when Sir Keir Starmer and his wife walked down Downing Street to applause on Jul. 5 this year, it was clear the identity of front-line politics had changed once more.  

Yes, the delighted onlookers were more diverse by age and background, but the corporate atmosphere that defined the previous 14 years of Whitehall politics had also faded.

And then the Lord Alli row over gifting broke.

So as Taylor Swift broke records at Wembley Arena with her Eras tour (stimulating not only the nation's enjoyment but also a significant upwards inflationary pressure) Keir Starmer found himself at the centre of a scandal that belied his earlier statements about propriety in politics. Several of his cabinet colleagues received tickets to that tour, seemingly for free.

How Will Labour Raise Taxes at The Budget?

While all that happened, Labour's first woman chancellor was bracing the country to pay more tax. Emphasising—with some tonal embellishment—that the Tories had left her party with a £22 billion "black hole" to fill, she told The News Agents podcast that taxes would "have to increase" in her first fiscal statement.

But that too backfired.

Because by the time the Labour Party Conference rolled around in September, Reeves found herself facing accusations she had been too downbeat in her rhetoric. Indeed, one Morningstar-rated fund manager has already told us as much.

In her speech in Liverpool, she became suddenly more optimistic. But this was not the victory it appeared to be.

Within three months of entering office, the new government had backed itself into a real corner. It had committed to freezing the headline rates of income tax, national insurance and VAT at the election. But in office it had also suddenly denied there would be a return to austerity.

Where would the money come from, then? Predictably, pensions are now in the crosshairs again. Talk of it is already affecting investors' behavior.

"Constant rumour and speculation about the future of retirement tax incentives—primarily the tax treatment of pension contributions and tax-free cash on retirement—are hugely damaging," says AJ Bell chief executive Michael Summersgill.

"People are taking financial decisions in part based on pre-Budget speculation and it chips away at people's confidence in pensions generally.

"Our customer data reflects this uncertainty, with pension contributions up by almost 60% in September versus the same month last year and the number of people accessing their tax-free cash around a third higher than the average during the past year."

What Will Labour Do To My Pension?

There is some good news. Fresh reports indicate a planned "raid" on pension tax relief is potentially out of the question. The chancellor has reportedly been warned that adjusting tax reliefs in the Treasury's favour (possibly via a flat-rate of relief of around 30%) would hit public sector workers too hard.

Other options do present themselves, including a change to the rules around tax-free cash withdrawals from private pensions, a hallmark of the so-called pension freedoms announced at the 2014 Budget and launched in 2015.

At the moment, savers can usually take up to 25% of the amount built up in any private pension as a tax-free lump sum, up to £268,275. These thresholds could be adjusted very easily, yielding more than £5 billion. And that's not even in the most punitive scenario.

Limiting the benefit to a maximum withdrawal of £100,000 would potentially raise £5.5 billion, says tax policy commentator Dan Neidle, director of taxation thinktank Tax Policy Associates.

What Changes Could the Budget Bring?

Morningstar.co.uk has previously looked in detail at potential tax changes in the October Budget:

• Inheritance Tax
• Capital Gains Tax
• Pension Rules

Will I Have to Wait Longer to Access a Private Pension?

The pension freedoms could change in other ways too.

"While we're on the subject of pension taxation and reform, I wouldn't bet against an increase to the minimum age at which people are allowed to access their private pensions," says Tom McPhail, director of public affairs at The Lang Cat.

"Currently 55 and going to 57 in 2028. A case can [surely] be made for bumping it up to 60 soon-ish."

And the inheritance rules could also change.

At the moment, a saver who inherits the private pension of someone who dies before the age of 75 does so without incurring any tax whatsoever.

If the deceased has passed away after reaching 75, however, pension providers deduct up to 45% of the pension in tax if the beneficiary receives the money as a lump sum. That's done via the Pay as You Earn mechanism. But the inheritance tax (IHT) rules could now come into play at the Budget.

Though inheritance tax (IHT) is almost universally hated by the very small demographic of people that actually pay it, the chancellor could apply the standard IHT rate of 40% to all pension inheritances, and, in the process, raise about £1 billion. That's according to Neidle.

What Should Private Pension Savers Do?

If you hadn't guessed it already, one option available to concerned savers and investors is to bring forward their pension their tax-free lump sum withdrawals.

Just remember, however, that taking tax-free cash is an irreversible decision.

"Taking your tax-free cash is an irreversible decision and, assuming the chancellor doesn't pursue a disastrous raid on tax-free cash, those people may find they're in a worse financial position long-term," Summersgill says.

For those less in need of the immediate cash, however, topping up a private pension, such as a SIPP, is another option ahead of a big raft of changes. According to Bestinvest, a consumer investment research and savings platform, its customers drove a 10-fold increase in pension contributions last month, compared to the same data in September 2023.

"Despite the uncertainty, topping up a personal pension, such as a SIPP, will remain an effective way to secure your retirement, no matter what pension changes Reeves delivers at the end of this month," says the company's personal finance analyst Alice Haines.

To that end, anyone feeling out of their depth should seek professional advice. Perhaps the chancellor would be wise to do the same!