Budget 2018: Experts predict outcome for pensions, investments and tax

Kyle Caldwell rounds up predictions for the plans chancellor Phillip Hammond may have for his Budget on Monday 29 October.

With just a couple of days until chancellor Phillip Hammond steps up and delivers the Autumn Budget, speculation is mounting over the contents of his red briefcase.

So below we round up predictions for the world of personal finance, looking at possible changes to pensions, investments and tax.

Pensions

Last year's Spring Budget and Autumn Budget were relatively quiet for pensions, but this time around, various experts are anticipating changes to pension tax relief, albeit tweaks around the edges rather than significant reforms.

For some time there have been concerns that pension tax breaks and allowances, or more specifically cuts to higher-rate pension tax relief, are on the government's radar in order to fund future spending pledges. 

The chancellor has a £20 billion problem on his hands – this is the amount of money he must find for the NHS each year by 2023 – so pension tax relief, which Hammond this month described as "eye-wateringly expensive", seems to be on his radar. Pension tax relief costs the government £39 billion each year.

Jason Whyte, associate partner of financial services at EY, says: "After a brief respite, pensions may be back in the firing line. Funding for the NHS dividend and the end of austerity has to be found from somewhere, and higher rate tax relief may look like a tempting candidate."

Other experts, including Sagar Morjaria, a wealth adviser at Canaccord Genuity Wealth Management, agree that pension changes could be on the cards. 

Morjaria adds: "There are many positives with pensions at the moment: you receive tax relief at your marginal rate, there is a broad range of investment options, and pensions fall out of an individual's estate. Given all the positives, there is always the chance that a government will make pensions less attractive." 

But rather than grappling with the thorny issue of pension tax relief reform, for example by introducing a flat rate of tax relief, the most likely way for Hammond to fill the Treasury coffers is by lowering the pension annual allowance to £30,000 from £40,000.

Simon Nicol, a pension expert at Thomas Miller Investment, agrees that this is the most likely route the chancellor will take if he decides to meddle with pension tax relief.

He adds: "With the end of austerity heralded by the prime minister and big spending plans for the chancellor to contend with, new tax revenues must be found. Once again, a tightening of pension tax reliefs for high earners looks the most politically acceptable option.

"We expect a reduction in the annual pension contribution allowance from the current £40,000 to £30,000. Also possible is a widening of the net of big earners who already have a further reduction in tax reliefs – expect the earnings limit for this reduction to come down from the current £150,000."

A flat rate of pension tax relief, though, looks unlikely. Such a move is viewed as a step too far politically.

Steve Webb, a former pensions minister and now director of policy at Royal London, says: "I do not believe we will see a flat rate of pension tax relief being introduced. It is such a big project and there will be plenty of losers. I don't think it is something a politically weak government can introduce at this time."

Elsewhere, the Lifetime Allowance (LTA), which is set to rise in line with inflation to £1,054,800 in 2019, is not expected to be cut. There could, though, be some changes to the way in which final salary schemes are tested against the stealth tax.

The current ratio, set in 2006 to value financial salary or defined benefit schemes for the LTA, is set at a multiple of 20. By raising the ratio more individuals will fall into the LTA net, which is viewed by some experts as an easy way for the government to raise extra revenue.

Jane Goodland, corporate affairs director at Quilter, says: "This figure (a multiple of 20) was based on the then view of that the cost of providing a pension of £1 a year was approximately £20. This then led to the original £1.5 million lifetime allowance set back in 2006 by Gordon Brown.

"To allow people to plan for their future, ex-chancellor Gordon Brown said the allowance would increase every year to reflect inflationary increases, a promise that was kept for five years.

"However, the conversion factor has not been touched, meaning it is now vastly out of date with the current transfer values on offer and has also meant there is a discrepancy in tax treatment towards defined contribution and DB pensions. Changing the conversion factor would arguably rebalance the current discrepancy."

Inheritance tax

While the rumoured proposed changes to pension tax relief have been taking up many column inches, a reform of the outdated inheritance tax (IHT) system could also be on the cards.   

Chancellor Hammond has already requested the Office of Tax Simplification (OTS) to carry out a review of IHT, to ensure the system is fit for purpose.

It will not come as a complete surprise, therefore, if changes are announced during the Budget, although Henny Dovland, TIME Investments' IHT expert, says it will be a "surprise if IHT is radically simplified".

He adds: "There is speculation that the chancellor will make changes to the UK's highly complex IHT regime.  This would be a welcome move as the number of families in the UK being caught in the IHT net continues to increase. Even if positive changes are announced, we still urge investors to take advice to ensure they are optimising their IHT planning."

Since 2009 the IHT threshold has been static at £325,000, which has been one of the big drivers behind IHT receipts rising to record levels. 

Morjaria also does not expect radical changes being made to the IHT system, but says a helpful move would be to simplify rules around gifting. He adds: "The rules around gifting are excessively complex, to such an extent that individuals do not take advantage of them and indeed are not aware of some of the exemptions that exist."

AIM shares could also be in the firing line. As part of the IHT review the Association of Accounting Technicians (AAT) called for shares issued by companies listed on the Alternative Investment Market (Aim) to lose their IHT exemption.

The AAT says that business property tax relief, which certain Aim-listed shares benefit from, was "not designed as an avoidance measure or to promote AIM-listed shares." In order to secure the IHT tax break, stocks must be held for at least two years and at death.

It adds: "There is no sound basis for allowing such an exemption to continue and AAT therefore recommends this also be removed." 

Investment

The rumour mill has been less active in terms of potential changes to the investment landscape. The ISA allowance, which stands at £20,000 a year, is expected to remain untouched.

However, Steve Cameron, pensions director at Aegon, has called on the chancellor to balance any reduction in the pensions annual allowance with a corresponding increase in the annual ISA allowance. This would mean the maximum people could save into a tax-incentivised savings vehicle would remain unchanged at £60,000.

He adds: "Both pensions and offer savers  important tax incentives including tax-free investment growth. However, unlike , the incentives for pensions are added 'upfront', costing the government money today through paying a 'tax relief' bonus on contributions.

"Income tax is due on three quarters of income once taken from pensions, but this may be decades into the future, far beyond the chancellor's budgeting time horizon. With , there's no government bonus added to contributions, so while all ISA proceeds are tax-free there's no cost to the government today."

Elsewhere, further changes to the dividend tax allowance, which last year was unexpectedly cut to £2,000, are not expected.
Venture capital trusts (VCTs) and enterprise investment schemes (EIS), which have been meddled with over the years, are also not expected to attract the chancellor's attention this time around.

As ever, there are the usual whispers ahead of a Budget that a new ISA could be introduced to address the looming care crisis in the UK. 

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