Industry experts have outlined their key asks ahead of the October Budget, urging the government to consider the long-term impact of any potential changes to the pensions market, particularly tax changes.

Rumours of potential pension policy reform began to swirl after Chancellor, Rachel Reeves’, speech in July, in which she highlighted a ‘£20bn black hole’ in public finances that needs to be plugged.

Indeed, RSM UK head of pensions, Ian Bell, noted that, with promises not to increase income tax, national insurance or VAT leaving the chancellor little room for manoeuvre, pensions could be viewed as a sitting duck, and changes are looking increasingly likely.

“We hope any changes will be made with a long-term plan in mind, avoiding a short-term raid that could potentially cost savers and the pensions industry dearly in the long run,” he added, however.

“Pensions saving is a long game, and successive governments frequently making changes that move the goalposts for retirees mean pensioners and the industry have suffered. We’d like to see the stability retained to provide certainty now and in future.”

The pensions tax system has been a particular area of speculation, as Broadstone head of policy, David Brooks, said that changes to pension tax relief is the main rumour doing the rounds and would have the biggest impact on people saving for a pension, although it is also likely to be the hardest.

“In brief, the proposal is to change giving tax relief off the top rate of marginal tax someone is paying, and instead set it at a different rate. This could be either a new standalone rate, say 30 per cent, or at basic rate for all,” he stated.

“This would likely be bad news for some higher rate tax payers but better for basic rate tax payers who would see a greater benefit in pension savings.

"It would also have challenges around salary sacrifice and net pay arrangements and could be very tricky to implement in Defined Benefit schemes so would have potentially major ramifications for public sector workers.”

However, PensionBee director of public affairs, Becky O'Connor, said that it is now time to "grab the bull by its horns", arguing that a flat rate could create a "simpler, more uniform approach" to pension tax relief.

She also said that this approach could offer a "significant advantage" to millions of basic rate and non taxpayers by encouraging them and enabling them to accumulate greater pension wealth with an extra government top-up every time they contributed into their pension.

"While higher and additional rate taxpayers would receive less in pension tax relief compared to what they receive under the current system, pension contribution tax advantages in general remain generous compared to those available in other savings vehicles," she added.

There could also be broader benefits, as O'Connor said that a simpler approach to tax relief could eliminate the need for complex self-assessment tax rebates for higher and additional rate taxpayers, a process many forget or are unaware of.

"In addition, more of the tax relief would go directly into their pensions rather than their bank accounts, making the process more straightforward, potentially more lucrative and ensuring all pension savers equally benefit from the available relief," she said.

Broader pension tax changes have also been raised, as Brooks said it has long been seen as overly generous that since 2015, a death before the age of 75 results in virtually no tax on defined contribution (DC) pension withdrawals, while deaths after age 75 see pension benefits paid inheritance tax free.

"Changing one or both of these rules would be a relatively easy move and potentially lucrative. This could risk devaluing the benefit of pensions as a savings method and from a technical point of view, there could be complications around trust laws," he stated.

Indeed, O'Connor said that bringing DC pensions into someone’s estate for inheritance tax purposes would remove a key advantage that pensions have over other forms of long-term investment for those who are focused on tax efficiency.

However, PensionBee research found that this change wouldn’t be very popular amongst savers, with 51 per cent expressing that they plan to, or already have moved money into their pension to reduce the size of their estate.

Instead, a significant proportion (60 per cent) of savers said that they’d prefer if inheritance tax was scrapped altogether.

This is not the only potentially unpopular decision, as O'Connor said that, despite the 25 per cent tax-free lump sum on pension withdrawals being widely recognised as one of the most popular pension benefits, there is speculation the Chancellor may reduce this, or cap the amount.

"The £100,000 cap that has been rumoured would be a low threshold, and would mean that anyone with a total pension of £400,000 or more (roughly the amount that someone with a ‘moderate’ living standard in retirement would need) would be impacted," she said.

"So a cut of this magnitude would negatively affect millions of middle income retirees, and would cause those on the cusp of retirement significant difficulty with decision-making."

However, Brooks warned that this may not be as likely to appear in the Budget, acknowledign that this is a change that would likely bring complaints about decreasing confidence in pensions as a saving concept, given tax-free cash is in one of its most recognised benefits.

Despite persistent rumours surrounding pension tax, industry experts are still keen to see changes in is around auto-enrolment, as O’Connor argued that an update is due on the introduction of the extension of automatic enrolment, to include reducing the age of auto enrolment from 22 to 18 and removing the lower level of qualifying earnings.

“Legislation enabling the extension of automatic enrolment was passed a year ago, however we await the introduction of the key measures that would help to boost people’s pension pots,” she said.

“A follow-up announcement on this is due and it could make sense for the government to mention it in the upcoming Budget alongside any updates on the Pension Investment Review, to give reassurance that savers’ retirement outcomes are being prioritised and to provide employers with clarity for planning purposes.”

But industry experts are already looking further ahead, as Brooks argued that mandating larger contributions from employees and employers is key to ensuring people are building up enough savings to ensure a good standard of living in retirement, particularly as defined contribution (DC) pensions take centre stage.

“With the long-term affordability of the state pension still a matter of debate, this is an issue that is likely to become increasingly pressing for governments of all colours,” he stated.

However, he admitted that this change is unlikely to appear in the Budget, as changes to auto-enrolment are expected to be contained within the second phase of the pensions review focused on adequacy.

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