Long read: 'Relief' as Chancellor holds off on 'drastic' pension tax changes; 'missed opportunity' for broader reform

Industry specialists have largely expressed approval over the absence of any major pension tax alterations in the Autumn Budget. However, there are worries that this might have been a “missed opportunity” for more extensive reforms in certain areas.

In her Autumn Budget, Chancellor Rachel Reeves revealed intentions to include pensions under inheritance tax starting in 2027, alongside proposals to raise employer National Insurance contributions.

Despite the anticipation surrounding the Budget, the government chose not to implement significant changes to pension taxes. This means they did not reduce the tax-free lump sum or introduce national insurance on employer pension contributions.

The pensions industry has expressed relief at this development. Tim Middleton, the director of policy and external affairs at the Pensions Management Institute (PMI), commented, “We are both relieved and pleased that the significance of our workplace pension system has been acknowledged and valued, even in these challenging economic times.”

Nigel Peaple, the chief policy counsel of the Pensions and Lifetime Savings Association (PLSA), shared similar sentiments, stating, "Despite widespread speculation that the Budget would weaken pension savings by cutting or eliminating financial support for pensions overall, we were very glad to find that this did not happen."

Many individuals in the UK should focus on increasing their pension contributions rather than reducing them if they want to ensure a comfortable income during retirement.

"We appreciate the emphasis on investment in this Budget, especially the adjustments made to fiscal regulations that will enhance public spending. We also value the assurance of stable policies coming from a comprehensive long-term industrial strategy."

Malcolm Reynolds, president of Aptia UK, mentioned that although it seemed earlier this year that the Chancellor was targeting pensions, it's "promising" that she has taken the industry's feedback into account and avoided making any impulsive decisions.

Matthew Arends, a partner at Aon and the leader of UK retirement policy, believes that the absence of significant changes will provide greater stability in the future. This will assist both employers and employees in their planning.

However, not everyone is pleased with the absence of more extensive pension tax reforms. David Lane, the CEO of TPT Retirement Solutions, stated that the Chancellor “missed the chance” to enhance pension tax relief for those in the lower tax bracket in this Budget.

"This would have created a more advanced system and had a meaningful impact on assisting some lower-income individuals in setting aside money for their retirement," he said.

"This budget failed to seize the chance to lower the auto-enrolment age for pension schemes to 18 and eliminate the minimum earnings threshold. Doing so could have provided more support for younger workers and those on lower salaries to save effectively for their future."

"We anticipate that these actions will be addressed during the next stage of the government's Pensions Review, which is expected to take place next year."

Patrick Heath-Lay, the CEO of People’s Partnership, which offers The People’s Pension, expressed these worries, suggesting that changes to auto-enrolment should be addressed without delay.

He remarked that raising the minimum wage for younger employees will soon make the existing age requirement for automatic enrollment seem out of place, and that it should be reduced from 22 to 18 as soon as possible.

"This should take place during the upcoming stage of the Pensions Review, which is important for outlining the goals of auto-enrolment, determining the appropriate contribution rates, and establishing the timeline for these changes."

Jamie Fiveash, the CEO of Smart Pension, expressed his agreement, adding that he feels “reassured” by the fact that changes to pensions are being implemented thoughtfully, with the government utilizing both phases of the pensions review to address important matters. However, he pointed out that the fundamental issue is that individuals are not saving adequately.

"We think that the futures of those who save have been affected by a lack of action in the past, and there are simple changes that can and should be implemented quickly," he said.

One issue we will keep advocating for is the growth of automatic enrollment, which currently has limitations that particularly impact many women and younger individuals.

Having a schedule outlining these changes and others like them would have been helpful. However, we appreciate the government's approach in using the pension review to gather opinions from the industry and to make well-considered updates in the upcoming Pension Bill.

Becky O'Connor, the director of public affairs at PensionBee, expressed her disappointment that the recent legislation allowing for the expansion of automatic enrolment wasn't highlighted. She noted that it would have been beneficial to assure savers that their retirement futures are being taken seriously and to offer employers clear guidance for their planning.

Royden Greaves, the CEO and founder of Jarvis, proposed that certain changes to auto-enrolment policies are necessary to assist self-employed individuals, who are frequently overlooked in discussions about the workforce.

This isn't the only instance of a "missed chance." According to Stewart Hastie, the chair of the Association of Consulting Actuaries (ACA), it's unfortunate that the ongoing speculation about pension tax changes hasn't been resolved.

"In our plan for financial stability, we received a guideline for corporate taxes, but there has been no plan for pension taxes!" he emphasized.

Tom Selby, AJ Bell's director of public policy, concurred, stating that "the chancellor's lack of a commitment to a Pensions Tax Lock increases the likelihood of instability making a return before the next fiscal event next year."

"In recent months, we've witnessed how disruptive this kind of speculation can be for individuals. There's been a significant rise in both pension contributions and the number of people taking out their tax-free cash before the Budget," he said.

When it comes to withdrawing tax-free cash, it's important to understand that once you make that choice, it can be permanent. This decision might lead to individuals missing out on benefits down the line.

More significant changes to pensions might be on the horizon. David Brooks, the head of policy at Broadstone, hinted that the Chancellor is likely to focus more on pensions in the upcoming Mansion House speech scheduled for November.

He mentioned that a summary of the initial section of the pension review is expected soon, and that the second section, which will address adequacy and broader concerns, is also set to be initiated during this time.

The Pension Schemes Bill, expected to be introduced in the House in Spring or Summer 2025, offers us many opportunities to anticipate, talk about, and prepare for in terms of pensions.

There is still a chance that some of the more difficult reform issues, which could greatly help many millions, will be carefully examined during this process so that both the advantages and disadvantages are properly considered and understood.