Pension warning: Sunak could make big change to allowance topping off ‘nightmare year’

Budget 2021: Laura Kuenssberg's analyses Rishi Sunak's plans

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Chancellor of the Exchequer, Rishi Sunak, announced his Autumn Budget this week, which included changes to pension cap charges. The Government will consult on changes to the regulatory charge cap for pension schemes in a bid to allow more institutional investment. However, Martin Lewis was among those concerned about the change. He said: “Slightly concerned about glib ‘regulatory unlock for pension charge cap’ i.e., increasing the charges cap so funds can charge more.

“This can be positive, as it allows a wider choice, but must not be allowed to push up the norm for charges for simple funds.”

Mr Sunak said he will implement the policy to “unlock institutional investment while protecting savers.”

Pensions have been at the forefront of the economic debate in recent months, but one expert fears savers could be dealt another blow in the future.

Tom Selby of AJ Bell commented on the possibility of the pension lifetime allowance being reduced in June.

He told This Is Money: “The Treasury appears to be rolling the pitch for another raid on people’s pensions, this time as part of an economic package to fund the UK’s coronavirus recovery effort.

“Given the parlous state of the UK’s finances, further speculation about the future of all areas of Government spending – including retirement savings incentives – was inevitable.

“However, all three of the pension tax reforms apparently in the Chancellor’s sights would be hugely risky, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment.

“Introducing a flat-rate of pension tax relief, an idea often touted by think-tanks, would present genuine practical challenges and would likely result in tax rises for public sector workers in defined benefit schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic.

“The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the Government increased their pension costs just as many attempt to recover from a nightmare year.

“More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, inadequate retirement saving remains one of the most significant long-term challenges.”

His was responding to a report from the Telegraph which claimed the Treasury was looking at plans to slash lifetime allowance from just under £1.1m to £800,000-£900,000, a big cut in pension top-ups for higher earners.

Chancellor Sunak didn’t make any more changes to the lifetime allowance in this week’s Budget, having already frozen the threshold until 2026.

But Nimesh Shah of Blick Rothenberg believes the lifetime allowance threshold will be reduced in the future.

He told Expres.co.uk this week: “The lifetime allowance was frozen in March, and has been brought down from £1.8million. It has been constantly brought down.

“Now it’s at just over a million, and it is frozen at that level for another five years.

“I think that it is something which is attractive for the Government and I can see it coming down, definitely, in the future.”

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Currently, 1.6 million savers in the UK have exceeded the £1.073million threshold, but with inflation rising, many more could be hit with bills.

The Bank of England’s chief economist warned last week that inflation could reach five percent by early 2022.

Huw Pill made the warning as the UK grapples with rising prices and labour shortages.

He told the Financial Times: “I would not be shocked — let’s put it that way — if we see an inflation print close to or above five percent [in the months ahead].

“And that’s a very uncomfortable place for a central bank with an inflation target of two percent to be.”

Mr Pill declined to reveal how he would vote at the Bank of England’s next meeting on November 4, but he said that the question of whether policymakers should hike interest rates from 0.1 percent is “live.”

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