Pensions tax relief: Reeves may have let cat out of the bag in debate over plans for a major shake-up

Freelancers Urged to Protect Their Pension Pots Amid New Rumours of Tax-Free Allowance Changes

Freelancers and self-employed workers using a Self-Invested Personal Pension (SIPP) or planning for early retirement may need to rethink their pension strategies if changes to the tax-free allowance on pensions take effect as part of the 31 October Budget. Recent reports suggest that pension savers could face a loss of up to £268,725 in tax-free allowances as part of the “painful” upcoming Budget set for 31 October.

According to recent reports, UK pension savers, including freelancers and those with SIPPs, could be significantly affected by a planned overhaul of tax-free allowances. During his campaign, Keir Starmer may have backtracked on introducing changes that could see the lifetime allowance (LTA) reforms, which currently allow individuals to build a pension pot of up to £1,073,100 without facing additional taxes, be eliminated or frozen, however, his comments about a “painful” October Budget could mean his administration actually goes through with a big move.

However, a freeze on the LTA could mean that pensioners with significant savings may now face tax charges if their pot grows beyond this threshold due to investment returns or additional contributions. The freeze could last until 2026, and with inflation and investment returns potentially pushing up the value of pension pots, many could find themselves unexpectedly caught out by the tax.

The debate that may have let the cat out of the bag

Mr Peter Bedford, Conservative MP for Mid Leicestershire, earlier this month on 3 September asked Chancellor of the Exchequer Rachel Reeves in a debate on occupational pensions tax relief: “Do the Government recognise the importance of workers’ saving for their later years? Do they recognise that any moves to reduce the 25% tax-free drawdown, or reductions in tax relief on pension contributions, would be a disincentive and would actually lead to more pensioner poverty?”

Her response was non-committal in answering the question, however, she may have revealed a very similar proposal to one suggested back in July that could reveal what she plans for a pension shake-up.

“I recognise that for many people who work hard and save for retirement, that money is not enough. I believe that every penny saved in a pension should produce a decent return. Billions of pounds of investment could be unlocked in the UK economy and could work better for those saving for retirement, and we believe that the reforms we seek to introduce through the pensions review could increase their pension pots by £11,000. My right hon.

Friend the Secretary of State for Work and Pensions is leading the review that I mentioned to ensure that pensioners receive a good deal in retirement, and that people who sacrifice and work hard to save for their retirement have a decent return on their investment.”

How exactly will billions in investment be unlocked?

Reeves’ phrase of unlocking investment, is very similar to a proposal suggested earlier this year. Hymans Robertson, an independent financial adviser, said in a press release in July that changing the way pensions are taxed can increase the amount the Government can invest into UK growth by over £20 billion a year, adding up to £100 billion over 5 years, according to their analysis carried out ‘A Pensions Plan for the New Government’.

“This could be done through reducing upfront tax relief on pensions, and then making pensions at the point of retirement tax-free,” according to Hymans Robertson. 

“The tax relief provided over time would remain the same, and the level of expected net income received by pension scheme members could stay the same when they retire. Through this, the government would gain billions of pounds from tax on pensions contributions right now, but individuals won’t lose out as they would not be paying tax on their pensions later in life.”

The firm suggested such reforms would not impact company profits either. Saying some “£20+ billion a year would be brought forward that the Government can invest, for example in the National Wealth Fund (NWF) and Net Zero-aligned sectors, and UK communities and growth.”

Impact on Freelancers and SIPP Holders

Freelancers and self-employed individuals often rely on SIPPs to manage their retirement savings, given the flexibility and control these products offer. Unlike traditional employees, freelancers do not have access to employer pension contributions, making SIPPs a popular choice.

However, the new rules mean that any pension pot growth beyond the frozen allowance could be subject to significant tax penalties, reducing the overall value of their retirement funds. For those planning or having to retire early due to personal or health reasons, the risk is even higher as their investments have more time to grow, potentially pushing them above the LTA.

Strategies to Protect Your Pension Pot

To safeguard their retirement savings, freelancers and those planning early retirement should consider the following strategies:

• Regularly Review Your Pension Pot: It’s essential to keep track of how your pension investments are performing. Regular reviews can help you identify whether your pot is approaching the LTA threshold, allowing you to make informed decisions about contributions and withdrawals. Check every three months.
• Diversify Your Investments: By diversifying your investments within your SIPP, you can manage growth rates and risk. This strategy can help ensure that your pension grows steadily without rapidly approaching the LTA limit due to a high-risk, high-return investment profile.
• Consider Alternative Savings Vehicles: Beyond pensions, consider other investment options like ISAs (Individual Savings Accounts) which offer tax-free growth and withdrawals. This can help reduce the pressure on your pension pot and spread your retirement savings across different products.
• Monitor Legislation Changes: Pension rules can change, often with little warning. Staying informed about any new legislation or changes to existing pension rules will help you make timely adjustments to your retirement plan.
• Seek Financial Advice: Consulting with a financial advisor who understands the unique challenges faced by freelancers can be invaluable. They can provide tailored advice on how to manage your pension pot, make the most of tax-free contributions, and navigate the complexities of pension tax allowances.

The Bigger Picture

Any changes to the tax-free allowance on pensions this autumn would come at a time when inflation and the rising cost of living are already putting pressure on retirement planning. For freelancers, who typically have less financial security than traditional employees, these adjustments could add another layer of complexity to their retirement strategy. However, the Labour Party may find a way to reduce tax-free pension contributions now with less taxes at the time of retirement. That said, some people are just years away from retirement and will be undoubtedly worried if there are any retrospective tax grabs, which would be very unpopular. Whereas, others have decades yet to weather different pension policies and governments.

Freelancers in particular must remain vigilant and proactive in managing their retirement savings. With careful planning and by taking steps to mitigate the impact of these changes, they can protect what they have invested in their pension pots and maintain a secure financial future.

As the UK government continues to evaluate pension allowances, it is crucial for all savers—especially freelancers and early retirees—to stay informed and take action to safeguard their investments.