This reaction was obviously a response to chancellor Rachel Reeve’s announcement that from April 2027 pensions would fall within the scope of inheritance tax. Some already do of course, but most personal pensions (including SIPPs) can be paid to beneficiaries free from any inheritance tax, due to the discretionary nature of the death benefit award.

So will this move kill the SIPP industry and in particular smaller SIPP providers who have already been under the microscope of the FCA, thanks to a number of high profile due diligence decisions made by the Financial Ombudsman Service, which have forced several firms into administration?

In truth the answer is that the SIPP should not be written off for the very good reason that, IHT protection aside, the product is still very tax efficient. It is worth recalling that many “experts” believed the new Labour Government was going to reduce or entirely remove the tax relief which is available on contributions. In the event they did not. Neither did they touch the tax-free cash sum, despite many commentators suggesting it would be capped at £100,000 or removed entirely.

Aside from the tax-free cash sum, which remains capped at £268,375 for most, it must not be forgotten that the investments held within a SIPP remain free from capital gains tax and income tax.

All that has happened in reality is that the pension has taken on similar tax breaks to the ISA, but with two key additional advantages:
1. That up to £60,000 can be contributed to it each tax year, if you are a UK taxpayer, have sufficient earnings and are not yet accessing your pension by way of flexi-access drawdown income payments. This is much higher than ISA annual contribution limits.
2. That contributions into pensions benefit from tax relief of up to 45%– an offer that would look attractive on any supermarket shelf!

Moving back to inheritance tax, we have yet to see the details involved with this change. We do know that it is intended that pension administrators will be required to deduct the income tax from the pension fund before any distribution is made to beneficiaries, which will inevitably make the process of paying claims much more complicated.

However, we do not know whether withdrawals from pensions will be treated in line with the current lifetime gift rules which govern the tax treatment of any money an individual gives away.

For example, if someone takes their tax-free cash sum and gives it away to a relative, will it potentially by liable for inheritance tax if the donor dies within seven years of the gift?

Ultimately, the Government’s motive with this move is to prevent pensions from being used as an inheritance tax avoidance vehicle and instead what they were designed for, which is a vehicle to provide income and benefits to the policyholder in their old age.

It’s also worth noting that there is no inheritance tax between spouses, who are the most common beneficiaries of pension pots when members die. Perhaps not the most romantic of proposals, but a sparkly ring might be a very attractive (from a tax perspective) accessory.

In the international market, if anything demand for SIPPS will increase, thanks to the removal of one of the overseas transfer charge clauses in the same budget, which will make it unlikely that many residents in the EEA/Gibraltar will be looking to transfer UK pensions to QROPS’ in the future.

As the rules become clearer, the need for good estate planning will become even more important. Hopefully this will provide an opening for sound advice from professionals. But the role of the SIPP in retirement planning should not be diminished. It has a key role and sensible tax planning can ensure that hopefully the impact of the inheritance tax changes are not as devastating as some fear.

So, how do you raise revenues when you have committed in your manifesto “not to raise the taxes of working people?”

In terms of the pension framework, there are several options, all of which could be problematic.

The first one is the relievable contribution system. It is speculated that the chancellor might bring in a single priced tax relief on contributions, just the 20% basic rate and perhaps also a single rate when income is paid. This potentially might raise significant revenue and some argue would be fair, as currently those who arguably least need it, receive very generous tax benefits on pension contributions.

However, it would be tricky from a political perspective, given the need to maintain key public sector staff such as GPs and consultants who benefit from higher rate relief on their DB pension schemes, and who would face ‘real time’ tax bills potentially if such a system were implemented. Others argue that moving away from marginal rate relief would undermine the point of pension saving for those at medium and higher income levels. Such a change would also be extremely difficult to implement, especially with occupational schemes operating the net pay system.

A second idea is that they might make employers pay National Insurance on the contributions they make to workplace pension schemes. Currently such contributions are exempt, as are a good chunk of employee contributions thanks to salary sacrifice schemes (where Income Tax and National Insurance are saved on such payments).

The most controversial change muted is a reduction or in the extreme, removal of the current pension commencement lump sum, which provides a 25% tax-free cash amount on pension savings, capped currently at £268,275. Could that be capped at £100,000 or even lower?

The problem with this change is 1) that it will arguably affect some of those “working people” the Government promised to not disadvantage and 2) it will trigger a mass exodus of pension savings between the date of the budget and the likely effective date, which one assumes would be April 6 2025. This risks both adverse harm to the pension industry and poor customer outcomes.

Perhaps the least unfair change would be a cap to the current unlimited levels of pension savings that can be sheltered from Inheritance Tax.

It is a quirk that whilst the nil rate band for IHT ends at £325,000, theoretically an individual can pass millions of pounds of pension savings to their beneficiaries and avoid 40% IHT charges altogether (though larger values may be subject to other pension taxes like the new Lump Sum Death Benefit Allowance, or beneficiary income tax for those pension savers who die aged over 75).

So, there are numerous choices available to the chancellor, but she must steer a careful path between raising needed revenues and reducing the already in many cases insufficient funds which are being committed towards pension saving, as we approach an era when many will retire with completely inadequate private pension income.

In the meantime, financial advisers and pension providers are facing a volume of queries from customers seeking to take pre-emptive action based on rumours and speculation – which may not come to pass. One can only hope that caution is counseled to avoid an ‘act in haste, repent at leisure’ impact on customers valuable retirement savings pots.

This budget promises to be the most interesting and potentially controversial in years. We are already seeing a large number of investors removing their tax-free cash sums, so we simply hope that whatever action is taken is done in a fair and decisive manner and at the very least removes the uncertainty and speculation which is not healthy for either the public or the pension industry.

By Steve Berridge, technical manager at IFGL Pensions

Having again ruled out increases to income tax, national insurance and VAT, she has not ruled out changes to capital gains tax, inheritance tax, or reforming tax relief on pensions.

The question now will be how she makes changes without breaking the manifesto promise of not increasing taxes on working people during this parliament.

Changes to capital gains tax would in one sense be no surprise, because it has long been highlighted that the level of tax on so called “unearned income” in the UK is lower than it is with earned income. A reduction in the top level of capital gains tax on property in April from 28% to 24% only reinforced the view. However, the annual allowance has been eroded substantially in recent years from £12,300 to £3,000 as at April 2024, so it might prove difficult to make further substantial changes.

Inheritance tax is another one that needs careful navigation. Due to the nil rate band having been frozen since 2009, it is no longer a tax on the rich and people with relatively modest estates can be potentially caught up in its web if they do not plan sufficiently.

One perhaps obvious move would be to remove the current protection pensions enjoy from inheritance tax or at least cap it. It is perhaps surprising that someone with for example, a personal pension worth £5 million, can pass on the entire fund to their beneficiaries with no inheritance tax deduction. An option could be a cap, possibly linked to the new lump sum and death benefit allowance (£1,073,100 ).

Another target might be the current income tax loophole that exists where beneficiaries of someone who died before 75 are able to take income payments with no income tax deduction, regardless of fund size, if they elect the drawdown option, rather than a lump sum.

The tax relief on contributions might be reformed. Tax relief is currently quite generous for higher income individuals. A single tax relief rate of 20% could provide substantial savings. Here again the chancellor needs to balance the need for fiscal prudence with the desperate need for pension provision across society to increase as current Gen X savers move into retirement during the coming decade or so. Any changes will also be complicated because many individuals contribute using salary sacrifice arrangements and benefit from relief at source .

Pension tax relief is the perennial pre-budget rumour, but the fiscal realities this time might mean the rumour mill has more substance.

Alternatively, the chancellor might do well to look at the very generous reliefs afforded to businesses which effectively protect dynastic wealth as it passes down the generations. Currently it is possibly to pass on agricultural land, companies and unquoted shares which have been owned for at least two years, with no inheritance tax liability. The protection for family businesses is laudable, but when the Duke of Westminster can reportedly shield most of a £6 billion fortune from inheritance tax, questions of fairness arise.

One thing is for certain, the October budget will be keenly anticipated by those of us in the pension world and until then, it is worth restating that a pension is a very tax efficient vehicle, avoiding some of the charges which affect alternative investment choices.

One of the areas most affected is that of overseas transfers. This includes transfers both from and to the UK.

For transfers to the UK, members who previously transferred to a QROPS and are now transferring it to a UK pension scheme are in danger of losing out, because the rules now require pension schemes to reduce the new Lump Sum and Death Benefit Allowance and Lump Sum Allowance by 25% of any lifetime allowance usage before 6 April 2024. The old overseas transfer BCE8 test used up lifetime allowance and if members haven’t crystallised benefits in the UK, they will incur a 25% deduction from the new allowances even though they haven’t taken a tax-free cash sum within the UK income tax regime.

The answer for members in this situation is to request one of the new Transitional Tax-Free Allowance Certificates (TTFAC) on transferring back to the UK, which will ensure their allowances are not reduced. They need to have that certificate however before they start taking non-taxable benefits in the UK.

The situation is more serious for individuals who wish to transfer overseas and have already crystallised benefits in the UK. This is because the calculation for the new Overseas Transfer Allowance (OTA) requires pension providers to reduce the OTA by the value of any lifetime allowance usage before 6 April 2024 and to reduce by 100% of the usage, rather than the 25% which applies in most other circumstances.

So, taking the hypothetical case of a bloke called Mike, imagine he had crystallised 75% of his pension fund in 2015, when the lifetime allowance was £1,250,000, designating to drawdown and taking PCLS.  If he now transfers his pension pot to a QROPS, the overseas transfer allowance will be reduced by 75% and the value of his pension measured against that smaller figure, rather than the full £1,073,100 allowance.

He is almost certainly going to exceed the OTA and incur a 25% tax-charge on the excess.

This double counting is a result of some clumsiness in the wording of the new legislation. Clearly what should happen is that the overseas transfer allowance is NOT reduced by previous lifetime allowance usage, or if it is, reduced by only 25% to be consistent with HMRC’s approach on their other new benefit calculations.

HMRC issued a last-minute newsletter on 5 April 2024 advising that members considering a transfer to a QROPS might wish to postpone it until the rules have been corrected. All well and good, but here we are in mid-June now, with no indication when HMRC will carry out the correction, which is really not helpful to ex-pats to want to move their pensions out to a QROPS and in some cases have time sensitive deadlines, due to the way in which benefits can be taxed in their new host country.

The UK election is likely to put the brakes on any legislative amends, so this is one area that advisers need to be on their guard for.  If your client is seeking to transfer overseas and has a large pension fund made up of crystallised benefits, then be very careful. It might be worth postponing the transfer for the time being, but at the very least careful consideration needs to be made of the impact of the charge, against any possible tax implications which may occur in the new scheme, if the transfer does not take place before a particular deadline.

That was March 2023 and much of the time since has been spent pouring over the Finance Bill as it made its way through parliament and more recently wrestling with the sheer complexity the replacement allowances have introduced. Meanwhile, the opposition announced that if elected, they would bring back the lifetime allowance.

Now the Prime Minister has wrong footed most commentators and pundits by calling an early General Election and so this issue of “will they, won’t they” has returned to the discussion table.

We are waiting for the publication of the party manifestos, but Labour has previously restated its desire to reinstate the lifetime allowance if elected, which based on polling at the time of writing, seems extremely likely.

Former Pensions Minister Steve Webb suggested a week ago, that the lifetime allowance will return, but not before April 2026 and then at a higher level.

The Institute of Fiscal Studies (IFS) has also published an article welcoming the return but suggesting that Labour has several options with pension benefit taxation, one of which is to increase the level of the lifetime allowance whilst capping the maximum tax-free cash sum. It also wondered if the current inheritance tax free status of pensions could be removed, which would be quite a major step.

Initial reaction to a reinstatement of the lifetime allowance has been strongest from doctors who it will be remembered the 2023 changes were particularly sold to. This group are now concerned that their large defined benefit pension pots might again potentially breach a lifetime allowance and leave them with some potentially significant tax charges.

Then in a fresh twist, over the weekend articles appeared suggesting that in fact Labour will not reintroduce the lifetime allowance after all, as it will be too complicated. We really are it seems playing a game of “in out, hokey pokey” with this subject.

This does all rather leave advisers in a difficult position of knowing what to say to their clients. Putting aside some of the more hysterical headlines in the Conservative supporting tabloid press, it is therefore worth examining the facts.

Firstly, the lifetime allowance was introduced by Labour in April 2006. However, the limit at that time was £1,500,000, which in today’s money is around £2,500,000. Labour then increased the lifetime allowance in stages, up to £1,800,000 at one point. Labour also introduced several protections to aid those with larger pension pots which had been built up before the introduction of the lifetime allowance.

After the coalition Government was elected in May 2010, the lifetime allowance limit was reduced in stages, first to £1,500,000 in 2012, then £1,250,000 in 2014 and finally £1,000,000 in 2016. It was then increased with inflation before being frozen at £1,073,100 from April 2020 onwards. The new LSDBA and LSA allowances are based on this figure.

All this history does lead us then to conclude that yes, perhaps Labour will, if elected, look to reintroduce the lifetime allowance, but at a higher level. We will just have to see, as this election it seems will bring more U-turns from both the main parties.

In the immortal words of Sergeant Pike then “don’t panic Captain Mainwaring”. Or for advisers perhaps the sensible approach might be “Don’t worry too much about what tomorrow might bring but consider options for your clients in the here and now”.

This promises to be a very interesting General Election in more ways than one and those us in the pension industry will certainly be watching developments very keenly over the coming months.

The only certainties in life for some of us right now appear to be “death, taxes and changes to pension legislation”.

By Steve Berridge, technical services manager for IFGL Pensions