When there is a £22bn black hole in the public finances, there was always going to be a strong chance the Treasury would use changes to pensions to raise some taxation.
In the end, the changes were not as deep or as severe as feared. Tax relief on pension contributions remains as it was, and the lump sum allowance sticks at £268,275.
However, in the run up to the Budget, there was a marked increase in the number of people paying more into pensions and accessing pensions. Some might have done it for the right reasons, but some might now be regretting their action.
If we are to avoid a re-run at every future fiscal event, the Treasury needs to commit to a pensions tax lock, guaranteeing that these fundamental elements of pensions will not change overnight.
If we are asking people to commit to tying their money up long-term, then it is only fair they should have reassurances that the terms of that deal stick.
There were a couple of changes, though, to pensions in the Budget. The bigger one is the intention to draw pensions into inheritance tax from April 2027.
It sounds simple, doesn’t it? But as so often is the case, the devil is in the detail.
The mechanics of how this will work when juggling using discretion to decide beneficiaries, personal representatives remembering to tell several different pension schemes of the death, using the new HMRC calculator to work out the apportioned nil-rate band for each of those pension schemes, and pension schemes paying out benefits and tax to HMRC – and all this within the six-month cut-off for probate – sounds complicated, if not impossible.
When figuring out the implications for clients, there are a couple of things to remember.
First IHT spousal exemption remains, so IHT will only apply on the second death. Secondly, if the client dies after age 75, then as well as any IHT the proposal states the remaining pension benefits when paid out will still be subject to income tax.
This shifts the effective tax rate for a beneficiary taking income to 52 per cent for a basic rate taxpayer and 64 per cent for a higher rate taxpayer. Quite the punch.
Clients will not want to saddle loved ones with that tax bill. But equally the reasons they saved for a pension and chose drawdown remain. The ideal situation is the pension pot lasts for the lifetime of the client and their spouse or partner, with nothing left over at second death. But that is quite the balancing act to pull off.
The new rules could change the order clients access their various assets. Traditionally, the pension has been left untouched, while clients have taken money out of Isas or other assets first. That order might now be reversed, depending upon the individual’s income tax rate and other personal circumstances.
