All the ways Rachel Reeves’s Budget will hurt pensioners

[dutchman]

Yet again we see the dangers of constantly meddling with pension rules



This Budget, which Labour said was to help “working people”, was always going to have little good news for pensioners, especially the oldest ones. However, I am really concerned that some of the decisions will actually be damaging to pensioners, their children, and to pensions as a whole.

The big pension tax change was the decision to end inheritance tax exemptions for unused pension pots passed on to the next generation.

This could have two negative impacts. Firstly, more people will decide to spend their entire pension fund quickly, leaving little or nothing for their later years. Secondly, the chance to help younger generations enjoy better pensions will be killed off with this measure.

Currently, those with accumulated pension funds have a significant incentive to keep that money invested for as long as they can. Present rules will see them paying tax at their marginal rate when they take it out, so they are best to keep it till a later date, until they need it later or may be in a lower tax bracket. Certainly, they are better off taking out small amounts rather than large lump sums, ensuring they have more to live on in their eighties and nineties.

When tax-advantage inheritance ends in 2027, passing on money from a pension will be taxed at 40 per cent, regardless of the size of that pension, as long as the total assets being passed on are large enough to attract inheritance tax.

In contrast to this, as long as the money someone withdraws from their pension, when added to their other income that year, totals under £50,271, they will only face 20 per cent tax. They can even withdraw enough to add to any other income that keeps them below £125,140 that year and still only face a marginal tax rate of 40 per cent. This means the incentive to pass on a pension to your offspring, rather than withdraw and use it during your lifetime, is reduced. If your estate is going to be charged inheritance tax, then there is no tax saving from keeping it until much older age.

This risks having much less to live on than you would otherwise have had as you reach older age, resulting in more struggling pensioners in future.

Ending the inheritance tax exemption also means younger generations having less pension provision than the current system. When a pension fund passes to a partner, it is still free of inheritance tax, but once it goes to your children, they inherit only 60 per cent of it. Current rules mean they only pay tax when they actually draw down the money, incentivising them, too, to spend it later, rather than earlier. This decision has killed off the potential option of facilitating better pension provision for future generations.

This massive change is a major blow to many people’s pension plans and yet again highlights the dangers of constant meddling with pension rules. Pensions receive generous reliefs in order to encourage people to make long-term plans for their retirement income. But any long-term planning requires stability of rules. Making fundamental changes every few years undermines confidence in long-term planning. It is disappointing to see such a spanner being thrown into the pension works of many older people.

The decision to end the inheritance tax exemption will also hit those who have transferred money out of defined benefit pension arrangements, specifically to help their children’s future if they were unlucky enough to die younger than they expected. Many have spent significant sums and will feel aggrieved that their careful plans have come so unexpectedly unstuck.

Finally, I would point out that pensioners at the other end of the scale – those without plenty of money in a private pension but living on little or nothing more than the state pension, could also be hit by the Budget. Further freezing personal tax thresholds, means more pensioners being caught in the tax net.

Next April, the full new state pension will be above the basic tax threshold. Anyone receiving more than this will need to fill in a tax return, often for the first time in their life. While working, their employer PAYE had arranged their tax and, once retired, their state pension did not stray over the basic limit, so they had no need to worry about tax at all.

Even though many pensioners should hear from the Inland Revenue about filling in a “simple” tax assessment form, they may not read the letters they are not expecting to hear from them, or may not be notified if their pension is paid directly and the authorities do not have their latest address. This problem must be carefully considered, otherwise more pensioners could face unfair fines and penalties.

By Baroness Ros Altmann