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The appointment of Nadhim Zahawi as the country’s chancellor of the exchequer following Rishi Sunak’s resignation this week is an opportunity to prioritise pension tax policy, one provider has said.
Shortly after his appointment by the prime minister, Zahawi called for PM Boris Johnson to resign. Johnson has since said he would step down as leader of the Conservative party.
Treasury is a key player in pensions policy
The Treasury has great influence setting pensions policy, particularly around how the tax system supports pensions, said Aegon’s pensions director Steve Cameron.
“This includes the valuable tax relief top-ups on contributions and the limits on how much can be saved,” he said, pointing out that it was former chancellor George Osborne who brought in pension freedoms, which shook up the pensions landscape.
Cameron said one of the “most contentious” pension measures Sunak had introduced was freezing the lifetime allowance, the maximum amount people can build up in pension without a tax penalty, until 2026.
“With inflation skyrocketing, more and more people are being dragged into facing this tax charge, and now may be the time to unfreeze this measure,” Cameron said.
“While Nadhim Zahawi will have many other more pressing priorities, we hope his appointment creates an opportunity to make sure pensions tax policy is truly fit for the current environment,” he added.
Stop tinkering with pensions
Meanwhile, Helen Morrissey, senior pensions analyst at investment platform Hargreaves Lansdown, urged the new chancellor to avoid making constant changes to pensions.
Following feedback from HL clients saying the biggest concern in pension saving was “piecemeal changes” by the government, Morrissey said constant tinkering would cause confusion for savers.
“Tinkering with rules has been a hallmark of the pensions industry in recent years, with lifetime and annual allowance thresholds being slashed and then frozen,” she added.
“The introduction of tapered and money purchase annual allowances has also thrown a spanner in the works for those on high salaries or who have accessed a pension, as they prevent them from making significant further contributions. Pensions are a long-term game and many of these changes have been introduced at short notice rather than as part of an overarching strategy," she said.
Among other issues, Morrissey called on the new chancellor to examine the money purchase annual allowance.
She said the allowance is meant to stop ‘recycling’, where people access their pension and then re-invest contributions for another round of tax relief, but they add needless “complexity and actively prevent people topping up their pension if they’ve been forced to dip into it”, she said.
Morrissey suggested anti-recycling rules which only kick in when someone has accessed their pension with the express intent to recycle the cash.
Inflation and cost of living crisis
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, urged the chancellor to provide more support for people on lower incomes in light of the cost-of-living crisis so they do not cut back saving for pensions.
“With inflation sky high and set to remain so for the rest of the year, it means more people running short of cash and considering cutting back their long-term savings – including pensions,” she argued.
Her comment echoed that by Paul Cullum, head of financial services at economics consultancy Frontier Economics, who said last month the longer inflation goes on, the more people are likely to contact their pension provider to adjust contributions.
He also warned of the risk of savers opting out of their pensions permanently without opting back in once the crisis is over.
Zahawi spent his first media appearances calling for a review of a planned increase in corporation tax from 19% to 25% next year, with a focus on making UK businesses more competitive, hinting the increase could be ditched.
Laura Suter, head of personal finance at investment platform AJ Bell, said the planned increase was expected to generate £11.9bn for the government next tax year and £45bn over the three years to April 2026.
“That means ditching the planned increase would leave a hole in the new chancellor’s budget,” she observed.
What do you think should be Zahawi’s pension priorities?
