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The Chancellor of the UK, Rachel Reeves, is currently contemplating changing the taxation structure of pensions in an effort to raise £22bn. There are several options that the Chancellor is considering, some of which could affect workers who are starting their first job, those already working, and even those who are retired. While the debate is ongoing, it is essential that everyone understands what could happen and why they should care, including those in their 20s.
One of the options being considered would require employers to pay National Insurance (NI) on the funds they put into workers’ pensions. This would allow the government to raise additional funds, but it could also harm businesses by leaving them with less money to invest in their companies. As a result, it could become more challenging to secure employment.
Another option is to limit the amount of money that could be passed on from pensions tax-free when someone dies. This money is currently exempt from inheritance tax, but if the current rules change, loved ones could end up with less money after a relative’s death. There is also the possibility of capping the tax-free lump sum that can be taken out by people aged 55 and above, but this could result in lower revenue growth for the government.
One suggestion is to introduce a single, flat rate of pension tax relief. While this could benefit lower-earning employees who currently receive lower tax relief, it could hurt higher earners who would receive less than they currently do. In addition, implementing the taxation changes for individuals with defined benefit pensions would be highly complicated.
It is worth noting that changes to the current taxation system of pensions would affect people differently. Therefore, it is imperative to understand how these changes would impact one’s finances, especially individuals in their twenties, who have a long-term interest in how their pensions are taxed
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