- Chancellor Rachel Reeves will not alter tax-free cash entitlements at the Budget, according to reports
- Temporary respite from speculation will come as a relief to many…
- ..but rumours will persist in the absence of a clear government commitment to pension tax stability
- AJ Bell continues to call for a Pension Tax Lock, promising stability on key pension tax incentives for at least this parliament
- Pension Tax Lock petition attracts over 20,000 signatures, with Petitions Committee demanding a clearer response from HM Treasury
AJ Bell director of public policy, Tom Selby, says:
“Attacking tax-free cash at the Budget would have been a massive own goal from the chancellor, raising little money and causing uproar from young and old alike.
“It would also likely have led to further industrial action from public sector trade unions, including senior NHS staff, at a time when public services are already creaking.
“No change to tax-free cash entitlements at the Budget is clearly good news but what we really need from this government is a lasting commitment to long-term stability so people can plan for the future with confidence.
“While any changes to pension tax relief would almost certainly come with protections for those close to retirement, it is entirely understandable that people are concerned by the speculation witnessed in recent months. When you save diligently throughout your career you deserve the right to plan ahead without the threat that government may move the goalposts before you can access your money.
“Constant rumour and speculation will damage confidence in long-term saving, lead people to make short-term decisions that may be bad for their long-term financial health, and cause wariness about household spending choices for fear government tinkering may upend financial plans. How many people will have taken a ‘wait and see’ approach to booking a holiday of a lifetime or pressed pause on a house refurbishment because they can’t trust government not to make a mess of their financial plans?
“That is clearly contradictory to the government’s growth agenda, as well as the stated aim of boosting long-term investing and pension adequacy.
“Instead of stumbling from Budget-to-Budget with constant speculation about pensions tax-free cash and tax relief on contributions, the chancellor should make a long-term commitment to a Pension Tax Lock – a pledge not to change tax-free cash entitlements or tax relief on contributions, at least for the rest of this Parliament. This would very clearly put the government on the side of hard-working savers and would cost nothing to deliver.”
Pension Tax Lock
AJ Bell has consistently campaigned for government to commit to pension tax stability, with a focus on key tax incentives – tax-free cash (pension commencement lump sum) and tax relief.
Constant speculation about potential changes to retirement saving incentives, particularly tax-free cash, undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. This is an unacceptable position given pensions form the cornerstone of long-term financial planning and personal financial responsibility.
Furthermore, it runs counter to wider government efforts to boost pensions adequacy and drive greater levels of investment, including in the UK economy.
The Tax Lock proposal calls for a government commitment to the two core tax incentives in-built in the pension system:
- Tax relief: Pensions operate on the basis of a tax deferral system whereby individuals are expected to pay tax in retirement but receive tax relief on contributions at their marginal rate.
- Tax-free cash: Individuals are entitled to take 25% of their pension tax-free, normally referred to as tax-free cash or a pension commencement lump sum. At the very least this entitlement should not be reduced from its current level of £268,275.
Last month the business launched a petition demanding government commit to a Pension Tax Lock. It has so far garnered over 20,000 signatories. Government responded on 22 October. On 5 November, the Petitions Committee asked it for a revised response .
Petition
The petition, registered on 1 October, can be found here.
Anyone can start a petition as long as they are a British citizen or UK resident. If a petition receives 10,000 signatures the government must respond. If it reaches 100,000 signatures it will be considered for debate in parliament.
Petition text:
Introduce a Pension Tax Lock to help protect retirement savings and incentives
The chancellor should introduce a Pension Tax Lock: a commitment not to reduce the amount people can withdraw from their pension tax-free or the amount of tax relief given on pension contributions. We believe this would help ensure retirement savings are protected and people can save with confidence.
We believe this simple commitment could put an end to the speculation seen ahead of every Budget – speculation which we think erodes confidence in long-term saving and can all-too-often lead to people making poor, sometimes irreversible, financial decisions.
We think this would come at zero cost to the Exchequer and would allow people to save for retirement with more confidence. We feel it could support the government’s twin aims of delivering pensions adequacy and boosting economic growth.
Government response (22 October):
This response can also be found on the petition page:
The Government is committed to ensuring pensioners have security in retirement and has launched a Pensions Commission to look at what is required to ensure the system is strong, fair and sustainable.
The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw on, throughout retirement. The Government is committed to supporting savers at all stages of life. That is why, for the majority of savers, pension contributions made from income during working life are tax-free. This is known as 'pensions tax relief'. This relief is available at an individual's marginal rate. For example, contributions from a basic rate (20 per cent) taxpayer who contributes to a registered pension scheme in 2025/26 receives tax relief at 20 per cent. This makes pensions tax relief one of the most expensive reliefs in the personal tax system, costing £78 billion in 2023/24.
Investment growth of assets in a pension scheme is also not subject to tax. From age 55 (or when scheme rules allow a pension to be taken), up to 25 per cent of the pension can be taken tax-free (capped for most at a maximum of £268,275), depending on scheme rules. Pension income received (for example as a regular annuity payment or as income drawn down from a pension) is subject to income tax at an individual's marginal rate, to reflect the fact that pensions in payment are a form of deferred income and have not been previously taxed.
With regard to the proposed ‘pension tax lock’, the Government does not comment on proposed tax changes or tax related speculation ahead of Budgets.
The Government recognises the importance of promoting confidence in pension saving and is committed to ensuring future generations of pensioners have security in retirement. This is why the government announced a landmark two-phased review of the pensions system days after coming into office.
The first phase, the Pensions Investment Review, focused on reforming the pensions landscape to boost savers’ pension pots. These reforms will be delivered through the Pension Schemes Bill. The Pensions Commission will build on these foundations and make recommendations to the government on the broader questions of adequacy, fairness, and sustainability to guide the long-term future of our pensions system. The Pensions Commission will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce.
More information on the Pensions Commission, including its Terms of Reference, is available here: https://www.gov.uk/government/publications/pensions-commission-terms-of-reference
HM Treasury
Petitions Committee (5 November):
The Petitions Committee (the group of MPs who oversee the petitions system) has considered the Government’s response to this petition. They felt the response did not respond directly to the request of the petition. They have therefore asked the Government to provide a revised response.
When the Committee receives a revised response from the Government, we will publish this and share it with you.
