Andy Bell: Pensions tax lock is Reeves’ only sensible choice

The first 100 days of Labour’s government have been marked by a slew of challenging headlines, from the controversy around freebies to the means testing of Winter Fuel Payments.

As speculation swirls ahead of this week’s Budget, chancellor Rachel Reeves is under pressure to demonstrate the stability and long-term vision promised during the election campaign.

Against this backdrop, discussions about reforms to pension tax relief and tax-free cash have intensified.

Since 5 July, predictions about a potential “black hole” in the nation’s finances have only escalated. With Labour pledging to maintain current rates of income tax, National Insurance (NI) and VAT, concerns around changes to pension policies have prompted a flurry of activity.

Given individuals are asked to commit to decades of pension saving, the Treasury should reciprocate by offering tax certainty

Wealthy individuals are rushing to maximise pension contributions, while others hastily withdraw tax-free cash – neither of which bodes well for the Treasury’s balance sheet.

The same pattern can be observed with capital gains tax (CGT), where businesses and investment assets are being sold off to secure lower rates before any adjustments. Though an increase in CGT seems likely, the Treasury has already benefitted from a surge of crystallised gains, offering a temporary windfall.

Pension taxation, however, remains a political hot potato. More often than not, proposed changes are shelved due to their complexity, while pre-emptive behavioural changes end up costing the Treasury.

For a chancellor looking to generate income, both measures come with complications and uncertainty

A responsible government should consider implementing a pensions tax lock, ensuring no fundamental changes to the tax framework for a fixed period. Given individuals are asked to commit to decades of pension saving, the Treasury should reciprocate by offering tax certainty.

Reforms to pension tax relief or tax-free cash, while contentious, may not raise significant revenue in the short term. For a chancellor looking to generate income, both measures come with complications and uncertainty. In fact, there’s a higher likelihood of NI being introduced on employer pension contributions or, less likely, a tax on pension death benefits. Should there be any changes on Wednesday, they should be the last for a long time.

By locking in a commitment to maintain the current tax incentives, Reeves could simplify retirement planning and encourage greater long-term investment

Reeves has a crucial opportunity here. By committing to no changes in tax relief or tax-free cash for the remainder of this Parliament, and potentially the next, she could transform a source of uncertainty into a political asset. Alternatively, depoliticising pension taxation by handing decisions to an independent body could foster trust and long-term stability.

Financial advisers, who help clients make decades-long commitments to pension saving, understand the importance of tax stability.

By locking in a commitment to maintain the current tax incentives, Reeves could simplify retirement planning and encourage greater long-term investment, supporting the government’s ambition to attract capital to UK Plc.

Andy Bell is co-founder of AJ Bell