On 28 October, John Healey will deliver his first Budget as Chancellor.
So far, he has been more successful at keeping the contents under wraps than his predecessor Rachel Reeves was with her two Budgets.
However, given the UK’s straitened finances, speculation is still building about whether he and the Prime Minister will be forced into raising taxes.
Healey inherited about £24bn of “fiscal headroom” – the buffer to stay within the government’s self-imposed rules on borrowing – from Reeves.
However, experts think this headroom has been squeezed to £14bn or less because of an increase in the UK’s borrowing costs in the wake of the US-Iran war.
It is possible that pensioners – as well as those saving towards their retirement – could be in the firing line when it comes to tax increases.
Here’s what you need to know about the Chancellor’s options:
The lump sum
Currently, most people can take up to 25 per cent of their private pension savings as a tax-free lump sum from age 55, rising to 57 in 2028.
Since April 2024, the limit for the Lump Sum Allowance (LSA) has been set at £268,275.
It is possible that Healey could carry out a tax raid at the Budget by lowering this limit.
Speculation about Reeves making a similar move led to a surge in pension withdrawals last year, although she ultimately did not touch the cap.
Tax relief on contributions
When you pay into a private pension, you currently get relief at whatever income tax rate you pay.
Basic rate taxpayers receive relief at 20 per cent, higher rate taxpayers get it at 40 per cent, and those in the additional rate band enjoy 45 per cent relief.
In the past, various governments have toyed with the idea of setting a flat rate of relief.
Applying the basic rate across the board would raise as much as £15bn, according to the Institute for Fiscal Studies.
Alternatively, the Government could set a flat rate of say 25 per cent, which would boost the pension savings of lower-earning workers who pay basic rate income tax, while cutting the savings of the highest earners.
Polls suggest there could be public support for such a change. Last month, The i Paper reported a survey by Survation commissioned by the Fabian Society which found that 72 per cent backed reducing higher tax relief on pension contributions for higher earners.
Exempting the state pension from income tax
Whatever decision Healey ends up taking on the lump sum and contributions, the Budget will contain good news for some pensioners.
This summer, The i Paper was the first to report that Andy Burnham’s Government would stick to a pledge made by Reeves to exempt retirees who are wholly reliant on the state pension from income tax.
Because of the triple lock policy, the state pension is set to climb to more than £13,000 a year in April, putting it above the income tax personal allowance of £12,570 for the first time.
In his speech to Labour’s annual conference last month, Burnham reiterated this promise, confirming “our commitment to ensure that the low-income pensioners won’t be dragged into paying income tax in this Parliament”.
The Treasury will set out the detail of how the exemption will work in the Budget.
The triple lock
There will be no immediate change to the triple lock – under which the state pension increases each year in line with the highest of earnings growth, inflation or 2.5 per cent – in this Budget.
However, change is coming to reduce the cost of the policy.
In his conference speech, the Prime Minister announced that from April 2030 the lock will be adjusted so that each year the state pension will increase every year by the highest of inflation or 2.5 per cent, while also holding its value relative to earnings over time.
The Government has said the change could save £15bn a year by 2040.
While the new policy will not come into force until April 2030, the Government has said it plans to legislate in advance for the change.
Other pension changes already on the way
Some changes to the taxation of pensions are already on the way.
From 6 April, 2027, most unused pension funds and death benefits will be included in a deceased person’s estate for inheritance tax purposes.
And from April 2029, the amount of national insurance relief workers can get by salary-sacrificing into their pensions will be capped at £2,000 a year.
The change means that middle and higher earners, or those who contribute a larger proportion of their earnings via salary sacrifice, will probably see a small reduction in their take-home pay.