Tax changes may force savers to ‘draw more heavily’ on their retirement funds

Pension plans may be dramatically altered in the coming months according to new analysis from Quantuma. A combination of economic factors have forced both the government and the public to react and various financial assets and costs may be overhauled.

Pension assets, mortgages and a whole host of financial assets have been dramatically affected by coronavirus. Rishi Sunak has in turn been kept plenty busy by the pandemic, with several support measures being launched to keep the economy afloat.

Support measures such as the Coronavirus Job Retention Scheme and SEISS have undoubtedly helped many during these tough times and the Chancellor of the Exchequer has extended the support on offer several times.

The various schemes on offer can be utilised until the end of the year but this has created a huge debt obligation which must eventually be covered.

Many have theorised that taxes will be the target of any repayment plans, which could impact anything from income to inheritance tax.

The treasury committee have already launched a tax inquiry to examine how tax after coronavirus could work and/or change.

When launching the inquiry in July, the committee had the following to say: “The reconstruction of the economy after the unprecedented economic fallout of the coronavirus crisis is an opportunity for the Committee to examine the tax system.

“The Committee will look at what the major long-term pressures on the UK tax system are, what more the UK can do to protect its tax base from globalisation and technological change, and whether such pressures should be met with tax reform.

“The Committee will also seek evidence on what overall level of taxation the economy can bear, the role of tax reliefs in rebuilding the economy, and whether there is a role for windfall taxes in the post-coronavirus world.”

Many experts within the field feel that Capital Gains Tax could be a key target for change and Darren Mason, the Managing Director at Quantuma warned that this could have a knock on effect for certain pension savers.

Some older workers and existing retirees may possess generous defined benefit schemes, which Darren warned could suffer in the coming months: “Unemployment is rising and set to accelerate when furloughing ends, and people will need to fund their basic cost of living.

“As a result, the level of transfer values are at an all-time high, with people withdrawing their benefits from their defined benefit/occupational pension scheme to access cash in an accelerated and flexible manner under the new pension freedoms to fund basic living and help loved ones who are struggling.

“With CGT rates hotly tipped to increase, many will be looking to draw more heavily on their pension earlier.

“With crashing investments and widening deficits, now is not an optimal time to be taking a transfer, as many trustee boards are having to take the decision to reduce transfer values to manage deficit levels.

“There is also the delicate balance between the risk of those not withdrawing their benefits of the scheme becoming insolvent and the remaining members benefits not being paid in full.”

Some savers may not fear these kinds of changes as they trust that the UK, and indeed the world, will recover much more quickly than most expect post-coronavirus.

However, Darren went on to provide analysis that put the situation into a worrying perspective: “To put things in perspective, Black Wednesday when we crashed out of the Exchange Rate Mechanism cost us circa £4billion.

“The estimated cost of furlough to the end of October is £100billion.

“This isn’t about buying a Lamborghini with your pension fund, as was talked about when the new pension’s freedoms came into force – it is about people keeping a roof over their head and that of loved ones.

“The danger here is people accelerating draw down on their pensions to pay for current consumption needs, deferring a financial problem for pensioners later into retirement.

“Should this happen, future governments will have to address, perhaps via increasing state pension rates or tax breaks for funding pensions in the coming years.”

Read the article in full here: 

https://www.express.co.uk/finance/personalfinance/1324521/pension-uk-tax-changes-retirement-funds