Rishi Sunak could target five key pension rules – how to prepare

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Rishi Sunak has yet to announce a date for the next Budget but it is expected to be released in the Autumn months. Many will be keeping a keen eye on the announcements as the Chancellor is expected to address coronavirus spending, and give details on his plans to pay for it.

Many fear pensions and/or their tax incentives may be targeted by Mr Sunak to cover pandemic costs.

Christine Ross, a Client Director at Handelsbanken Wealth Management, reflected on this and discussed five key pension areas that could be targeted for reform.

Pension tax relief – move to flat rate 25 percent

Ms Ross began by addressing pension tax relief rates: “There are rumours before each Budget that tax relief on pension contributions may be scaled back.

“Currently relief is available at each individual’s highest tax rate. Steps have been taken in recent years to limit the amount of tax relief and whilst there has been speculation regarding the introduction of a single flat rate this has so far not materialised.

“A rate of 25 percent would give a greater saving incentive to basic rate taxpayers who currently benefit from 20 percent relief and scale back the tax relief for the highest earners. If you are a higher or additional rate taxpayer, it may be prudent to maximise your pension contributions before the Budget.

“Once you have paid the maximum £40,000 for the current year you can look back to the previous three tax years and utilise any unused contribution allowance. It is not possible to make a contribution greater than 100 percent of your total taxable earnings in the current year.

“Since April 6, 2021, any individual with a total income of over £240,000 per year including pension contributions has had reduced pensions tax relief; for every £2 of adjusted income over £240,000, an individual’s annual allowance is reduced by £1. This should be factored into any decision-making.”

Lifetime allowance – reduce rather than freeze

Mr Sunak has already made changes to pension lifetime allowance rules but Ms Ross noted additional options may be available to the Government.

Ms Ross continued: “With inflation increasing in the short term, the freeze in the Lifetime Allowance (LTA) announced in the March budget has an even greater impact. But there have been rumours that this could be scaled back even further from the present £1,073,100 to £900,000 or even £800,000.

“Currently, pension funds in excess of the LTA are taxed at a rate of 55 percent if taken as a lump sum and 25 percent if taken as an income. If there were to be a reduction in the LTA this would very likely be accompanied with another opportunity to fix at the current level, but in exchange for making no further contributions to an approved (tax favoured) pension arrangement. If there is scope for you to do so, you may wish to maximise contributions prior to the Budget.”

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Annual allowance

The annual allowance has dropped dramatically over the last decade or so and while it may be unlikely, Ms Ross warned further cuts could arise.

Ms Ross warned: “The annual allowance is currently £40,000, having reduced from its highest level of £255,000 in 2010/11. Whilst most probably lower down the priority list, it is possible that the Chancellor would seek to reduce the allowance further as a way of restricting tax relief. So far he has used other methods such as an ‘income cap’ to limit the level of relief for the highest earners but he could decide to reduce the actual allowance which would potentially simplify the system. The advice is again the same. If it is affordable, make maximum pension contributions now.”

Pension commencement lump sum (PCLS)

This area, Ms Ross detailed, could be among the most likely to face change: “Probably the greatest pre-budget pension hype relates to a potential change to the pension commencement lump sum (PCLS), otherwise known as tax free cash.

“Currently up to 25 percent of the pension fund (up to the lifetime allowance) can be taken tax free. Some choose to draw tax free cash at the point of retirement although others may draw on this earlier for a specific purpose, e.g. to pay off the mortgage, and defer drawing a pension income until later.

“The PCLS can also usefully form part of the regular income payments drawn from an investment based pension scheme alongside a taxable income, in some cases allowing total taxable income to remain within a lower tax band. I would be very surprised if there were to be a change to the PCLS that would be imposed retrospectively although I think it is highly possible that PCLS could be limited to benefits already earned.

“This might mean that all future contributions, or even fund growth, did not attract a tax free element at retirement. There is little action that can be taken in advance of such a change and for those who have already reached age 55, I would not advocate rushing to withdraw tax free cash prior to the Budget.”

Money purchase annual allowance (MPAA)

The MPAA may actually be increased, as Ms Ross explained: “The money purchase annual allowance restricts the annual contribution allowance to £4,000 for those who have already drawn an income from their investment based pension. This was introduced essentially to stop ‘recycling’ – drawing out pension benefits to fund further contributions and generating tax relief all over again. During the pandemic some savers who have already reached minimum pension age have accessed their pensions in order to temporarily make up for lost earnings.

“Withdrawing just the tax free cash element does not trigger the MPAA but taking just £1 of income does.

“There are many who, having returned to work, will want to replenish their pension funds but will be limited to just a tenth of the full £40,000 allowance.

“The Chancellor may take this into consideration and look to increase the MPAA to allow pension savings to be rebuilt.”

Ms Ross concluded by providing guidance on how pension savers can prepare for these potential changes, which was broken down into do’s and don’ts: “It is never a good idea to take a course of action purely on the speculation that a tax break might disappear,” she warned.

“It has to form part of your overall planning. However, if it was always the intention to maximise pension contributions, I would probably act sooner rather than later.”


  • “Make extra pension contributions now if you have not paid the maximum for the current year.
  • “Look back over the last three years and use up the allowances from those years.


  • “Use all your spare savings to pay into your pension if this leaves you without any readily accessible funds for emergencies.
  • “Draw out all of your tax free cash unless you already have specific plans for these funds, e.g. paying off the mortgage.”

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