A reader recently accused me of being a ‘drama queen’ after I penned a coruscating article about Labour’s attack on our wealth in the forthcoming dog’s dinner of a Budget.
He’s entitled to his opinion, of course. But it’s my job to call out any government which plans to hit our household finances and personal wealth with a barrage of higher taxes.
Especially one which spends money on benefits and public sector pay rises as if it was water. And one which doesn’t seem to have a clue as to where it is going to get its extra tax revenues from.
One minute it’s letting us know that income tax rates are going up. The next, it’s saying they aren’t.
Whichever way the Chancellor Rachel Reeves (surely now a dead Chancellor walking) goes about plundering our finances in the Budget, it will be no small matter. The impact will be awful.
So if I can alert readers to what lies ahead, and help defend their finances and wealth from the nasties coming their way, I consider it a job well done. No drama.
Of the tax rises and restrictions on tax concessions coming our way, it’s the Government’s assault on pensions that irks me the most.
It’s damaging on many levels – and flies in the face of a promise made this year by Pensions Minister Torsten Bell to build ‘a strong, fair and sustainable pension system’. As Jim Royle of BBC sitcom The Royle Family would say: ‘Fair pension system, my a**e!’
Rachel Reeves pictured before her Budget last year. The impact of her next Budget on November 26 will be awful, writes Jeff Prestridge
Maybe it will be ‘fair’ for those in public service with later life bankrolled by a gold-plated pension.
But not for those in the private sector. Since Labour stormed into power, the Chancellor (assisted by the hypocritical Bell) has gone out of her way to attack private pensions. In so doing she has undermined our confidence in these long-term savings vehicles – and tricked many into making financial decisions they now regret.
Foremost among the crimes committed is to allow rumours about cuts to pension tax-free cash to fester for far too long.
Reeves and her Treasury acolytes did this ahead of last year’s Budget, and they repeated the sin in the run-up to the Budget this month, panicking thousands of people into taking tax-free cash they didn’t need.
Money that, if left inside their pension, would have continued to benefit from investment growth, swelling the size of their pot – and increasing the amount of tax-free cash they could take when they really needed it. Money that in most cases –whether part spent on a luxury holiday, a home extension or simply parked in a cash account – triggered the payment of taxes, benefiting most of all the Treasury, of which the Chancellor is head.
A Treasury which is frantically looking for ways to fill an alarming hole in the nation’s finances, caused primarily by Labour’s reluctance to stop binge-spending.
Thankfully, Treasury officials have now made it known (unofficially) that tax-free cash will not be touched in the Budget. It means that, for the time being, those who really do need to access their tax-free cash can rest assured the rules aren’t changing.
That means they will be able to take a quarter of their pension fund as tax-free cash, subject to a £268,275 cash cap.
Fine and dandy? Yes, but I would bet my bottom dollar that come next summer the same rumours will resurface – and Labour will do little to quell them in the hope that it can persuade (dupe) yet more people to move cash from a tax-friendly investment wrapper into the tax domain.
My view is that the probability of a Labour crackdown on pension tax-free cash will ratchet up between now and 2029. Indeed, if next year’s Budget is delivered by a new Chancellor (maybe the tax-grabbing, free-spending Mr Bell) and overseen by a more Left-wing Prime Minister, a cut is a nigh on certainty.
Most likely is a reduction in the cap to £100,000, or even maybe just £40,000.
The Government’s assault on pensions flies in the face of a promise made this year by Pensions Minister Torsten Bell (pictured) to build ‘a strong, fair and sustainable pension system’, writes Jeff Prestridge
So for those who next year are either planning to retire or pay off their mortgage, may I urge you to make a note in your diary along the lines of: ‘Speak to an adviser about taking tax-free cash before the Budget.’ You’ll thank me.
Sadly, there are other horrors happening to our pensions.
One is already confirmed: the inclusion of unspent pensions in estates from April 2027, a move which will drag tens of thousands more households into the inheritance tax net.
The other is speculative, but a dead cert given the research that Government officials have already done on implementing it.
It involves a clampdown on the use of ‘salary sacrifice’ work pensions, which cut National Insurance (NI) bills for both workers and employers.
In simple terms, a worker gives up (sacrifices) a portion of their salary. In return, their employer pays an equivalent sum into their pension pot. By doing this, the worker pays less NI, resulting in more take-home pay. The employer also has a lower NI bill because they don’t pay it on the salary diverted into the worker’s pension.
A third of private sector employees use these schemes, but Reeves is keen to recoup a big chunk of the annual £4.1 billion lost in NI revenue. This will be done by capping the amount of salary that employees can sacrifice.
It is best illustrated by way of example (thank you, wealth manager AJ Bell).
Thelma earns £55,000 a year, but sacrifices 10 per cent (£5,500) into her work’s pension. Her annual take-home pay is £39,161, higher than the £38,720 she would have got if the £5,500 pension contribution had been taken from £55,000 of gross salary. This is because she would pay more NI on £55,000 than £49,500. The employer also wins because its NI bill is cut from £7,500 to £6,675.
But if, as rumoured, Reeves imposes a £2,000 cap on salary sacrifice, both Thelma and her employer lose out. Although Thelma’s pension contributions would remain the same, her take-home pay would drop to £39,043 while her employer’s NI bill would rise to £7,200.
The ramifications are massive. The Thelmas of this world would likely reduce their pension contributions to make good the loss in take-home pay. Some employers would look to mitigate the higher NI costs by trimming the payments they make on behalf of employees – or cutting employee numbers.
If you are in such a pension arrangement, I would seriously look to increase your ‘sacrifice’ now to boost your pension funding before the cap comes in. Any Budget change is unlikely to bite until the new tax year in April.
Reducing the incentive to save into a pension fund makes no sense whatsoever. All it will do is increase the number of people (currently 15 million) who do not save enough for retirement – and who will need benefits to support them in later life.
‘Fair’? No. It’s pension policy dreamt up in a political madhouse.
Sadly, there could be more bad pension news in the Budget, given the Chancellor has decided after all not to break Labour’s manifesto by jacking up income tax rates.
Ruling out this big tax grab means she has to look for other sources of revenue – and potential cuts to costly tax breaks. It means she could crop the respective 40 and 45 per cent tax relief on pension contributions which higher and additional rate taxpayers enjoy.
For sure, introducing a flat rate of tax relief – 20 or 30 per cent – would be welcomed with glee by most Labour MPs. As would a reduction in the £60,000 annual cap on contributions eligible for tax relief.
So tuck as much money away inside your pension as you possibly can before Reeves makes life more difficult. And no – I’m not being a drama queen.