Fresh warnings are emerging of a Budget set to raid pensions tax relief, as the government faces a “triple whammy” of revenue shortfalls.

Royal London director of policy, and a former pensions minister, Steve Webb, has warned that Chancellor Philip Hammond is likely to turn to pensions tax relief again, as a way of raising revenue for the Treasury.

“Since 2010, the Treasury has ‘form’ on raiding pension tax relief on an almost annual basis. With pressure to spend more, especially on young people, and with revenue shortfalls from a stuttering economy, a politically weakened Chancellor is likely to turn again to tax relief as a source of less politically challenging revenue raising.

“The annual allowance remains the most likely source of cuts, especially with the increase in the ISA limit, but other aspects of the system may not escape scrutiny. Pension savers must long for the day when pension tax relief is a stable regime which supports long-term planning, rather than an easy source of ready cash for cash-strapped Chancellors.”

The latest HMRC figures suggest that the cost of pension tax relief rose by around £3bn in the last year for which figures are available. In addition, the cost of not charging National Insurance Contributions on employer pension contributions rose by a further £2bn.

Top of Webb’s list of possible cuts are the annual allowance, which could be cut to £35,000 and then £30,000 and the tapered annual allowance, which could be cut in the £150,000 threshold to £125,000.

He said one little-noticed reason why annual allowance reductions are now more likely is the major reform of public sector pensions. In the past, public sector pensions were based around an individual’s final salary, which meant that someone who was promoted (eg from a deputy head to a headteacher) saw a big surge in their pension rights as their whole service became valued at their new enhanced salary.

“A generous annual allowance was needed to avoid such individuals facing a big tax bill when they were promoted. However, public service pensions are now based on a ‘career average’ basis, which means that promotions do not create the same surge in pension rights. The government may conclude that they can now justify a much lower annual allowance,” Webb said.

In relation to the tapered annual allowance, Webb said the Chancellor is likely to look to revisit the measure to see if extra revenue can be found. This could be by reducing the £150,000 threshold and/or increasing the taper rate. From the Chancellor’s point of view, the attraction is that this is a complex area which will affect relatively few voters but which could raise significant amounts.

Rating it slightly less likely to happen, Webb thinks there could also be a cut in the lifetime allowance down to £900,000 from £1m. He also thinks there is a chance Hammond may opt to change the detailed rules around pensions tax relief.

“One attraction to the Chancellor of changing the detailed rules around pension tax relief is that the system is not widely understood by the general public and the political impact of changes is therefore much reduced.”

Therefore, he suspects there may be a reduction in the ability to ‘carry forward’ unused allowance from earlier years: at present, individuals can carry forward up to three years’ worth of unused annual allowances; this means that whenever there is a change to the annual allowance the revenue takes time to come through as people simply carry forward unused allowances from earlier years to make up the shortfall.

Less likely Webb thinks there could be a further reduction to the Money Purchase Annual Allowance and applying National Insurance to employer pension contributions. However, something Webb does not think will change is a cut in the 25 per cent tax free lump sum people can take from their pension.

“A politically weak Chancellor would find it incredibly difficult to remove this benefit which is one of the few elements of the pension tax relief system which is reasonably widely understood and valued. He could, in principle, announce that *new* money going into pensions would no longer attract a tax free lump sum, but this would raise little revenue in the short-term and would stoke up alarm that existing tax-free lump sums could be under threat.”

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