Our thoughts on the speculation related to the Budget

There has been much speculation about the forthcoming Budget announcement. Our view is that it’s sensible to deal with known facts when planning, rather than trying to second guess changes that may or may not come into play.

Here’s what we know so far:

• The Labour Party manifesto stated: “we will ensure taxes on working people are kept as low as possible. Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”.
• From 30 October 2024, school and boarding fees for school terms starting on or after 1 January 2025 will be taxable at the standard rate of VAT of 20%.
• Households in England and Wales will no longer be entitled to the Winter Fuel Payment unless they receive Pension Credit or certain other means-tested benefits.

All other commentary and opinions are based on speculation. Some examples of speculation that we have seen include:

• “Tax-free cash lump sums from pensions will be capped at £100,000”
• “Pensions will no longer remain outside of our estates for Inheritance Tax (IHT) purposes”
• “Tax relief allowable on pension contributions will be reduced”
• “Capital Gains Tax (CGT) rates will increase.” Incidentally, we expect that this is likely to happen.
• “An additional Income Tax levy to pay for Larry the Downing Street cat’s new vegan diet” – ok, we made that one up!

In all seriousness, there is no doubt that the government has some significant challenges to contend with, including NHS and social care funding, building the economy, climate change issues, and security.

The message from Rachel Reeves that “our finances are worse than we expected” isn’t unusual after any government change. There is a suspicion that politicians of every persuasion are happy to float ideas with journalists to gauge opinion and test reactions. This naturally encourages a fear of the worst and in a world of social media and headlines designed to gain website clicks, stories can soon be assumed to be facts despite nothing being officially announced.

Our view is that any changes to pension rules without a proper and thorough review of the existing legislation would be futile and contentious to say the least. This is unlikely to meet the government’s immediate stated need to raise further revenue and encourage Britain to grow.

This is simply our opinion, and we have no clearer idea of what will be announced on 30 October. So, let’s return to what we know.

Drawing tax-free cash from your pension may be something you’ve considered to try to protect your 25% entitlement up to the Lump Sum Allowance (£268,275 in 2024/25). However, there are a few aspects to consider before doing so based on the current rules:

• Investment growth in pensions is tax-free. If withdrawing to reinvest, Income Tax and CGT could arise, potentially reducing the future real return on your investments.
• Under current rules, the pension value sits outside of your estate for IHT purposes. But every £100,000 that you withdraw from your pension could create a potential IHT liability of £40,000.
• Even if the government did introduce a £100,000 lump sum cap, you could still withdraw higher lump sums. Any withdrawals in excess of the cap would be taxed at your highest marginal tax rate. For example, drawing a lump sum now to theoretically avoid a 20% (assuming basic-rate) tax charge, could see an IHT charge at 40% later on.
• When pension allowances have changed in the past, there has been a transitional arrangement which has provided individuals with a degree of protection against the impact of the changes. Examples include Primary and Enhanced Protection when the Lifetime Allowance (LTA) was introduced in 2006, and Individual and Fixed Protections when the LTA was reduced. Though there’s no guarantee this would happen again, it would be reasonable to expect transitional arrangements if the lump sum is capped at a lower level for those with entitlements above £100,000.
• If it happens at all, the next question is when. We’d expect the pension industry to protest if it was brought in with no notice on 30 October. It is fair to expect that systems wouldn’t cope in that situation.
• Even if you instruct a withdrawal now, there is a significant risk that the pension providers will not be able to issue payment before 30 October.

We believe the most sensible approach is to act only if you need money for a specific purpose. Attempting to second guess what may or may not be announced in the Budget brings real risk that you seek to avoid an outcome that doesn’t arise and then find it has been to your detriment.

We hope this helps to provide some context and consideration. Your planner will be happy to discuss further if you have any specific concerns.

Register for our free webinar on Thursday 31 October for our full summary of the changes announced in the Budget

We are hosting a webinar at 10 am on Thursday 31 October to ensure you are updated as soon as possible after the Budget is announced.

On the webinar, you will learn:

• What the fundamental changes are
• How they could affect you and your finances
• Any actions you should potentially be taking.

It will last approximately 45 minutes, including time for questions.

Please click here to register for the webinar. By registering, you will receive a webinar recording even if you can’t attend.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The information in this report is based on our understanding of current UK HMRC rules and practice. This is subject to change without notice and its effect will vary on individual circumstances.

Financial legislation can become subject to substantial review with possibly retrospective changes to tax treatment or regulation in the future.