As Spring has sprung, there is always once certainty in financial services, a Spring Budget or Statement keeping everyone on the edge of their seats.
But, hopefully things can be more interesting for the advice sector after the damp squib in October 2021.
Interestingly, for the Autumn Budget 2021, HM Treasury could not contain the countless leaks in the build up to the budget, where we knew what was going to happen before Rishi Sunak’s speech. However, it is most certainly not the case this time around.
Barely anything has transpired from the chancellor or his team, beside hints that measures might be taken on fuel duty to help with the rising cost of petrol.
Beside this, it’s arguably all up for grabs and open for speculation. Many believe that measures will be taken to ease the burdens of rising inflation, living costs and energy bills, as well as a potential delay in the implementation of higher National Insurance contributions.
International Adviser has collated the rumours around decisions chancellor Sunak is likely to take in his statement on 23 March 2022.
Becky O’Connor, head of pensions and savings at Interactive Investor, believes pension tax relief will be spared by Sunak as a way to protect against inflation.
“Pension tax relief is routinely flagged as a potential target for the chancellor with any budget or Spring statement announcement,” she said. “There hasn’t been so much concern this time that it might be for the chop, so it would be a big surprise if he moved to slice relief for higher earners.
“In a high inflation environment, pension tax relief offers a key way to overcome the impact of inflation on long term savings. It’s the secret weapon of long-term savers and investors, whether they are basic or higher rate taxpayers. So, cutting it now would be very detrimental to the nation’s future financial wellbeing in retirement and ultimately could make even more people dependent on the state pension in years’ to come.
“While it’s hard to know how much of a disincentive to save into a pension cutting tax relief would be, as awareness of how it works is questionable, for higher rate taxpayers who are prioritising pension savings later in working life as they approach retirement, it is more likely to be a big incentive over other types of saving or investment vehicles. They are already being disincentivised by the lifetime allowance. Any other disincentives would make planning a good retirement much harder.”
And the lifetime allowance (LTA) is indeed another area of speculation, with several players hoping in a de-freezing of the threshold – set at £1,073,100 ($1,455,170, €1,272,580) until at least 2025/26, as announced in the Spring Budget 2021.
Steven Cameron, pensions director at Aegon, said: “By not increasing this in line with inflation, it is reducing the amount people can save in pensions in ‘real’ terms without facing an additional tax charge.
“The LTA was designed to limit the amount of pensions tax relief for the wealthy, but now it increasingly impacts many not so wealthy people, particularly those with valuable defined benefit pensions.
“Many more individuals could face an unexpected tax penalty as a result. We’d welcome Rishi revisiting this decision in light of current rocketing inflation, ideally by unfreezing the limit earlier than planned and returning to inflation-based increases.”
Raising taxes for the wealthy would be a popular move at a time where the average household is being squeezed left, right and centre and the effects of the war in Ukraine being felt across the globe.
Laura Suter, head of personal finance at AJ Bell, said: “Capital gains tax (CGT) generated £10.6bn last year, and this is rising as property and investment prices climb. There has previously been speculation that the current CGT rates of 10% and 20% (or 18% and 28% for property) will be scrapped and instead everyone will pay income tax rates on their gains.
“This move was mooted by the Office for Tax Simplification in a previous review. The stipulation from the OTS was that investors should get some sort of inflationary relief, so they are only taxed on above-inflation gains. Clearly any relief would reduce the tax-take for the government, so that may be quietly ignored in any final rules.
“In a less radical move, the government could cut the tax-free allowance from its current £12,300. The allowance has already been frozen until 2026, but Rishi Sunak could go one step further and cut the allowance.
“Chopping it in half, to £6,000, would generate £480m, while cutting it to £2,500 would give an £835m boost to government coffers, according to OTS predictions.”
Additionally, inheritance tax has time and time again proven incredibly lucrative for the government with the latest data showing a £5.5bn take between April 2021 and February 2022 – a £700m increase from the same period a year prior – so Sunak will likely either maintain the current regime, increase rates or lower the minimum tax-free sum.
Suter added: “If the chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death. Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75.
“Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not. If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them.
“Inheritance tax is the other lever the Treasury could pull, either by increasing the current 40% rate or lowering the amount that can be inherited tax-free. Both measures would inevitably lead to ‘death tax’ headlines, however – not something politicians generally welcome.”
More financial advice and guidance options?
But Aegon’s Cameron thinks that the chancellor may take advantage of Brexit to pull away from some of the inherited EU legislation and implement “new forms of financial guidance”.
“Rules put in place at EU level mean regulations limit how much support firms can offer to those who are not prepared to pay for full ‘regulated advice’,” he said.
“We’d welcome changes here. Allowing more personalised forms of guidance alongside advice would free up firms to offer enhanced support to customers, not just to help them plan for their retirement, but when making other important savings and investment decisions.”