Change to IHT treatment of pensions is ‘top concern for investors’

interactive investor poll sheds light on the concerns of pension investors ahead of the Budget.

As the chancellor prepares to announce the Autumn Budget next week, a poll from interactive investor, the DIY investment platform, reveals the tax changes that would most concern pension investors if they were implemented.

The biggest concern among Self-Invested Personal Pension (SIPP) holders is making a pension subject to inheritance tax on death, with four in 10 (40%) respondents to the poll saying this was a worry for them.

The next most worrying potential change would be reducing or limiting the amount of tax-free cash available to people when they access their pension for the first time, which would concern one in four (25%) pension investors.

A reduction in the Lifetime Allowance would cause the most concern for 16% of respondents, while reducing tax relief on pension contributions would trouble 15%. Only 4% said they would be concerned by a reduction in the amount you can contribute.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “This poll reveals a significant proportion of people worry about potential changes to pension taxes and could be affected by any reductions or restrictions.

“The allowances and reliefs that come with pensions make them the most attractive way to invest for retirement. If the chancellor feels tempted to tap that vein, he risks people giving up work without enough in their pensions for a decent income because they are worried about being hit with charges, or because pensions begin to lose their attractiveness relative to other ways to invest for the long term.

“The ability to pass on what’s left in a defined contribution pot tax-free is a key benefit of this type of pension and a kind of consolation for the loss of generous old-style defined benefit schemes that offer guaranteed income for life, but in general no ability to pass anything on to relatives.

“Reducing the amount of tax-free cash available would affect everyone with a pension and would therefore be deeply unpopular and the effects widely felt, although could be justified from the point of view of dissuading people from taking out too much, too soon from their pension.

“A reduction in the Lifetime Allowance sounds like a nice concern to have, but over time, with investment growth and inflation, more and more people who have been lucky enough to get generous pensions through work or have saved diligently – not just the wealthy - will be affected by this limit, beyond which a tax charge is payable.

“Reducing tax relief on pension contributions was a concern for a smaller 15% of people, either because it is often mooted but has so far never been proposed by government, or because people genuinely feel a reduction wouldn’t affect them too much. For higher or additional rate taxpayers, a cut to tax relief on contributions could make a big difference to their eventual pot size.

“It looks like a reduction in the annual allowance isn’t concerning for most people. It’s currently £40,000 or up to your annual earnings level, falling to £4,000 for those who have started to take an income from their pension already.

“We know from our Great British Retirement Survey that tax in general is a top three concern for pension investors, following years of constant meddling by successive chancellors. They will be awaiting the outcome of next week’s Budget with some nervousness.”

Notes to editors

• The poll of 1,163 SIPP investors was conducted by interactive investor among visitors to its website between 25 and 28 June 2021.