Rumours and speculation over the pension reforms that could feature in tomorrow's Budget have continued to ramp up, with less than 24 hours to go until what many are speculating could be a significant, and perhaps challenging, Budget.

Speculation over the reported pension changes that Chancellor, Rachel Reeves, could announce in the Budget continued to intensify in recent months, as while tax relief changes have reportedly been axed, concerns remain that the Chancellor could still be tempted to make changes to salary sacrifice or extend the freeze on tax allowances. 

Industry experts rallied behind the calls for Reeves to reconsider changes to salary sacrifice, pointing out that even the government's own research suggesting that this could damage morale around pension saving.

Commenting ahead of the Budget, Association of British Insurers (ABI) director of policy, long-term savings, Yvonne Braun, warned that, if the government goes ahead with suggestions to cap salary sacrifice, "then we’re no longer sleep-walking, we’re speed-walking".

The pensions industry is not alone in the call against salary sacrifice changes, as the Federation of Small Businesses also co-signed a letter to the Chancellor urging her to reconsider changes to pension tax or salary sacrifice.

In addition to this, research from the ABI and Reward and Employee Benefits Association (REBA) found that, if the government were to introduce a £2,000 threshold on salary sacrifice for pension contributions, 31 per cent of businesses would reduce their contributions to an employee’s pension, and 45 per cent would reduce other employee benefits and services.

And whilst some have suggested that the lack of understanding or awareness around salary sacrifice could make it a more politically viable measure, My Pension Expert policy director, Lily Megson-Harvey, emphasised that "it’s still a step away from a tool that has helped many build long-term financial security".

"Rather than removing options, we should be expanding access to pension-saving strategies and focusing on those who are currently disengaged or unaware of how underprepared they are for retirement," she stated.
 
“This is a moment for the government to show leadership on long-term financial wellbeing, not just by protecting existing schemes, but by investing in education, support, and incentives that help more people take control of their financial futures.”

Braun agreed, arguing that "these types of short-term revenue raisers put the long-term security of people’s futures at risk".

Reports of an extended freeze on tax allowances have also prompted concern, with separate modelling from LCP and the Institute for Fiscal Studies (IFS) suggesting that this could have a detrimental impact on current and future pensioners alike.

The impact of all of this speculation has not gone unnoticed, as our latest Pensions Age blog explores, this is arguably one of the most rumour-driven Budgets in many years, which has had a knock-on impact on saver confidence.

Indeed, research from Penfold found that 73 per cent of UK savers lack confidence that the government will protect pension savers in the upcoming Budget

Many have also been watching the markets closely ahead of the fiscal announcement, with Hymans Robertson head of capital markets, Chris Arcari, pointing out that, "as we close in on the budget, gilt yields are about 15-20bps off their autumn lows".

"As the Chancellor has walked back from a proposed increase in income tax rates (while reducing national insurance at same time) the budget is now expected to be less disinflationary and revenue raising measures less uncertain," he stated.

"The piecemeal plans on the table to raise revenues are more backloaded and less certain, which has increased the “term” or risk premium on UK government debt and placed downwards pressure on Sterling.

"Larger changes to narrower taxes could also harm the economy through their distortive impacts on consumer and business behaviour."

How the markets will react to Reeves' Budget is as of yet unknown, but Arcari, warned that, while debt-crisis concerns raised by some commentators are a little farfetched, UK yields are vulnerable to sentiment, and the Chancellor will need to deliver credible fiscal consolidation plans with regards balancing revenue and day-to-day spending.

"Should the chancellor rebuild more headroom than the market expects, this could see a rally in long-end gilt yields," he stated. 

"However, the major broad revenue raising levers off the table, this might be hard to deliver. If revenue raising measures delivered in budget are seen as credible and disinflationary, we might expect to see gilt yields and sterling move lower, as markets start to price in rate cuts and a reduction in term premia. 

"If the measures lack credibility, we might see yields rise via an increase in term premia, while sterling declines at the same time – this combination could be interpreted as the markets not giving the budget pass marks." 

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