In a sombre speech outside No 10 Downing Street, Rishi Sunak, the UK’s new Prime Minister warned of “difficult decisions to come”. Some are due on 17 November when Jeremy Hunt, who remains Chancellor of the Exchequer, is scheduled to present the Government’s Autumn Statement (an upgrade of the Medium Term Fiscal Plan, which had been due on 31 October). Pensions policy could feature on both the tax and the spending side.
When Mr Sunak was Chancellor, he was reported to have considered cuts to the Lifetime Allowance (over and above the five-year freeze he had already implemented), restrictions on tax-free cash, and a flat rate of tax relief on pension contributions. Dominic Cummings, who advised Boris Johnson in 2019 and 2020, has blogged that he and Mr Sunak’s team tried to close “pension loopholes” but met resistance from Mr Johnson.
Mel Stride, the MP who managed Mr Sunak’s campaign for the Conservative leadership and has since become Secretary of State for Work and Pensions, recently suggested in the Financial Times that Mr Hunt could “drop the top rate of relief on pension savings” – which might mean the 40% rate rather than the 45% rate that these words imply if taken literally. Rupert Harrison - reportedly a member of Mr Sunak’s informal “brains trust”, as well as serving on Mr Hunt’s Economic Advisory Council - said in 2021 that he had “always liked” the idea of a flat rate of relief.
Major changes to pensions taxation remain easier to talk about than to deliver. For example:
However, the threat this time may be more credible than in the past, with more acceptance that “difficult decisions” are necessary and with Conservative MPs potentially feeling under existential pressure to unite under their new leader.
Even if pensions taxation itself does not change, other tax changes can affect returns on saving. For example, there are reports that the freeze in personal allowances and tax thresholds might be extended. This could affect who gets tax relief at what rate and how much private pension income can be tax-free, over and above the tax-free 25%.
On State Pensions, Lord Ashcroft’s biography of the new Prime Minister says: “One Westminster figure recalls Sunak telling him as long ago as 2017 that renewing the triple lock commitment was a bad idea”. In theory, the Government could uprate the State Pension with earnings (5.5%), rather than inflation (10.1%). That seems less likely to happen at the next uprating now that Mr Sunak has sought to anchor the legitimacy of his premiership in the mandate won for the Conservatives’ 2019 manifesto, but the Government could conceivably explore whether to use the lower CPIH measure of inflation (8.8%). Instead, as Mr Stride has suggested, the Government could reduce the generosity of the triple lock in “later years”, i.e., beyond the next election.
Meanwhile, a decision on when the State Pension Age should rise to 68 is due by May 2023. Baroness Neville-Rolfe confirmed last month that her report has been submitted to DWP. Although projected life expectancy has come down since a rise to 68 in 2039 was pencilled in, recent speculation has been about whether this will be brought forward, not whether it will be pushed back. While it is unlikely to affect the fiscal arithmetic before 2028 (when the rise to 67 completes), the Government could announce its intentions early as part of a long-term fiscal sustainability agenda.
Mr Sunak’s February 2022 Mais Lecture may be the most detailed statement of his economic agenda. This listed “greater levels of capital investment by our businesses” and “driving up business investment in research and development” as two of his top three priorities for accelerating growth. It remains to be seen whether No 10 will be receptive to suggestions that the draft defined benefit funding regulations could unnecessarily impair business investment.
One of Mr Sunak’s principal advisers, Liam Booth-Smith, previously worked for the late James Brokenshire when the then Housing Secretary advocated letting first time buyers use pension savings for a deposit on a property, so there could be support in No.10 for this idea.
