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Budget 2025: how pensions and ISAs could change · On The Money

• 0:03
  Kyle Caldwell: Hello, and welcome to On The Money, a weekly show that aims to help you make the most out of your savings and investments. So in this episode, we're gonna be covering what to expect from the budget in late November. As usual, there's plenty of rumors and speculation about how the nation's personal finances may or may not be impacted when chancellor Rachel Reeves unveils the contents of the famous red briefcase on the November 26. Now just a caveat, we're recording this podcast on Friday, October 24, which is just over a month before the budget. So please do bear that in mind, particularly if you're listening to the podcast or watching it on YouTube in a couple of weeks' time.
• 0:50
  However, given there's already been plenty of pension and ISA and other rumors, we wanted to do our budget preview show now rather than wait until near the time. Now joining me to discuss what to expect from the budget and to and to offer his expert insights is Craig Rickman, personal finance editor of Interactive Investor. Craig, great to have you back on the podcast.
• 1:16
  Craig Rickman: Thank you very much for having me back on.
• 1:18
  Kyle Caldwell: So, Craig, let's start off by setting the scene. So a fiscal black hole has emerged. Some estimate this black hole as being around 30,000,000,000. Some estimate it to be up towards 50,000,000,000. Why is there this black hole?
• 1:37
  What has caused it?
• 1:39
  Craig Rickman: So to try and be as brief as as possible with this, when, the government came to power and Rachel Reeves assumed the position as chancellor, she set herself these narrow ironclad fiscal rules. The main one of which is the day to day spending would be funded by tax receipts, and borrowing. So the government would only borrow to invest. But due to a cocktail of factors this year, such as soaring borrowing costs, which have eased a bit recently but are still really high, some policy u turns such as winter fuel and the The UK's tepid economic growth has created this gap between what the government is getting in tax and what it's spending, and hence, this this black hole. And that explains why we've had, you know, the return of, you know, this all these all these rumors around what might happen, particularly in terms of in terms of tax hikes because, you know, if the government wants to plug that black hole, then they're either gonna have to raise taxes, cut spending, or more likely a combination of the two.
• 2:49
  Kyle Caldwell: And in terms of addressing this fiscal black hole, the government has backed itself into a bit of a corner. It's man it made a manifesto pledge not to increase taxes on working people. It pledged not to raise income tax, national insurance, or VAT during its five year parliamentary term, and it also committed to not raising corporation tax too. Some think that Reeves may now be forced to roll back on this pledge, and there have been some rumors, Craig, that in respect of income tax that we may well see a rise in the budget.
• 3:30
  Craig Rickman: Yes. Yes. Well, seems desperate times may have to be met with desperate measures. And so, yeah, it's been reported that the government is eyeing up raising the basic rate of income tax by a penny. So it's currently 20%, so there's talk that it could be raised to 21%, which could potentially raise 8,000,000,000.
• 3:50
  So a significant sum. But, yeah, there are I mean, this this would be a a controversial move for for a few reasons. The first one is you noted that with the manifesto pledge, it would involve breaking that. And then, I guess, further to that, labor has sort of repeatedly said it's those with the with the broader shoulders that would face the the highest burden. And this would be, you know, this would affect this would affect a lot of a lot of people, you know, with, you know, the the the basic rate of tax.
• 4:20
  Some some believe that the government may instead target the higher rates of tax, so the 40% rate and the 45% rate. The problem there is that it wouldn't raise as much revenues, So, you know, the the the juice may not be worth the squeeze there. So that's another thing. Also, I mean, what we must also sort of take into account is that raising the the raising income tax, the basic rate of income tax wouldn't just affect earnings. There's lots of other things that it would impact as well.
• 4:51
  So any pension income, whether that's from drawdown and annuities, particularly as we know that from or we expect from April, the state pension the full state pension is likely to almost fully absorb the tax free allowance due to the the triple lock provided that's pushed through at the budget. So it means that any other income that people receive in retirement will will be taxed. It also affects, you know, rental income, the the interest that we pay as well. So yeah. And I guess the the other point as well is the, you know, raising the the the basic rate of income tax at a time when the cost of living crisis is still enduring.
• 5:34
  I mean, inflation has plateaued. It's been 3.8% for the for the far past few months, but that's still far higher than the Bank of England would like it to be. So it would it would be a a a, yeah, a deeply controversial thing to happen, but perhaps the government feels they they've they've got no choice.
• 5:53
  Kyle Caldwell: Well, let's now move on, Craig, to the rumors around pensions. Of course, it wouldn't be the run up to a budget without some speculation of potential changes to the pension tax regime. Although, hopefully, they won't come into fruition, particularly after the inheritance tax proposals that were announced last year, which come into effect in April 2027. So, Craig, the main sort of rumor at the moment is that there may be changes to the tax free cash. So under the pension rules, if you're taking your pension flexibly under pension freedoms, you can withdraw 25% of your pot tax free up to a maximum limit.
• 6:39
  Could you talk us through, Craig, what the maximum limit is and what the fears are regarding how that may be reduced?
• 6:46
  Craig Rickman: Sure. Yeah. So, yeah, speculation about tax free cash in a in a in a sort of deja vu repeats of last year's budget have really dominated the headlines. We'll come on to that in a second. But just the so the rules around making tax free pension withdrawals.
• 7:05
  So, yeah, you so those with defined contribution pensions, most people would define contribution pensions can take up to 25% of their pot tax free, and this is capped at 268,275. You don't have to take all your tax free cash in one go. When you hit the age of 55 or it's currently 55, it's going up to 57 in a few years' time. You don't have to take the lot in one hit. You can take it in stages.
• 7:35
  But that's where some of the well, that's sort of around the maximum amount of tax free cash is where a lot of the fears are, and that's where, you know, the the speculated changes are homing in on. The the the 268,275 figure could be reduced to a £100,000. And, I mean, I guess, you know, like you said earlier, I mean, I, you know, I I hope that the pension tax system is is left alone. People need consistency there. But there but there are a lot of fears that that it might be cut.
• 8:07
  You know, financial advisers have been seeing increased inquiries from clients about whether they should draw their tax free cash now in light of, you know, if you know, to try and get get ahead of any potential changes. You know, various others, some FCA data as well, sorry, that that showed that tax free withdrawals had had upticked in the in the past year. I think we should note that that that that's not the only reason or that people aren't accessing more tax free cash than they were before just because of the the budget rumors. There are other reasons too. As you noted, the the forthcoming change to to IHT.
• 8:46
  So with pension set to be brought into the inheritance tax net from April 2027, some people are accessing their pensions there to avoid their heirs potentially paying double taxation on death if they if they were to pass away after age 75. Because at that point, whoever receives it could pay both inheritance tax and income tax. That's another reason.
• 9:07
  Kyle Caldwell: As well as concerns that tax free cash may be meddled with, there are also some rumors doing the rounds, Craig, that there may be changes to pension tax relief. I remember around a decade ago, back when George Osborne was the chancellor, there was lots of reports that and concerns that higher rate pension tax relief would be meddled with. But reforming upfront pension tax relief is complicated. Craig, what are your thoughts on this rumor and this potential change? And there have been some reports that the government may introduce a flat rate of pension tax relief.
• 9:49
  Could you talk us through this?
• 9:51
  Craig Rickman: Sure. Yeah. So rumors about a moving to a system of for a flat rate of pension tax relief or upfront pension tax relief have have emerged before, you know, pretty much every major fiscal event in the past ten years. It's never happened partly because, you know, as you've said, that it's it's it's not a a simple thing to implement. It's not a simple thing to change.
• 10:18
  But there there are sort of a couple of rumors around this and a couple of ways the government could do it. I mean, I guess sort of going back, the the the reason why it may be looked at is because it costs the government a lot of money every year. So more than £50,000,000,000, the government sort of shells out on on on pension tax relief, and around two thirds of of that figure is claimed by the higher earners. So those who pay 40% or 45% tax. So if the government does need to raise money by restricting pension tax relief for higher earners, it's seen as a way to, yeah, to to raise some cash and potentially plug that fiscal black hole.
• 10:56
  So there there are a couple of ways that they could do it. The extreme is just to, you know, completely remove higher rate tax relief on pension contributions. Everyone would get 20%. That would be aggressive. That would, you know, that would really, you know, disincentivize anyone who pays higher rates of tax from paying into a pension.
• 11:16
  They may actually turn to to other assets. So that's the that's the most extreme option. The alternative is, like you say, is to introduce a flat rate. So let's say that's 30% so that lower earners get a bit of a boost, but higher earners don't get as much relief. So if you pay if your income so if that were to happen, if your income's sort of more than 50,270, which is the higher rate threshold, you would lose out.
• 11:41
  But if your income's below, it would gain you would gain from it. Sorry. But, yeah, it's it's very complicated, you know, sort of more so than the fact that a lot of pension tax relief is claimed by defined benefit schemes. Some people have speculated that if a flat rate was introduced, then it could spark the demise of many of of the sort of final or the the last standing of the defined benefit schemes in the private sector. So, yeah, it's a complicated one.
• 12:12
  There's these rumors surface every time. They're back here again. But, again, we'll we'll have to wait and see what happens on the November 26.
• 12:21
  Kyle Caldwell: And due to fiscal drag, so the freezing of the income tax thresholds, which has been the case now for several years, and we may well get an announcement in the budget about whether that policy will continue, the fact is more and more people are now high rate taxpayers and will be impacted by any potential changes to pension tax relief.
• 12:45
  Craig Rickman: Absolutely. Yeah. This this wouldn't just moving to a flat rate of pension tax relief wouldn't just affect higher earners or the highest earners. Like you say, more and more people, millions more people are are tripping above the or tripping into the higher rate tax band, becoming higher rate taxpayers due to, like, say, tax tax thresholds being frozen and and and rising income. So, yeah, this this this would affect a lot of people.
• 13:10
  A lot of what you'd be seen as as sort of Middle England would would be affected by a flat rate of pension tax relief, it would, yeah, it would harm their ability to save for retirement because the the tax relief that you get upfront with a pension is one of the really attractive parts of it, perhaps the most attractive.
• 13:30
  Kyle Caldwell: A final point on pensions is I've not really seen any rumors or speculation that there'll be any changes to the pension triple lock. There have in the past been rumors that the pension triple lock may be reformed into potential double lock, removing the earnings elements of the equation, but I've not seen any speculation so far. Have you, Craig?
• 13:52
  Craig Rickman: No. Well, the government is committed to the triple lock for for the rest of this parliament. So we wouldn't expect any any changes. I guess it's it's more the long term future of of the state pension and particularly the state pension triple lock, which is which is less clear.
• 14:11
  Kyle Caldwell: Let's now move on to potential reform to ISIS. You mentioned earlier, Craig, a sense of deja vu, and this is also the case for ISAs. It's been rumored for a while now that there may be changes to cash ISAs, that the annual £20,000 limit for the cash ISA version may be cut. I've seen reports that it may be cut to 10,000. Could you talk us through this?
• 14:40
  Craig Rickman: Sure. Yeah. Like you say, there've been lots of rumors around potential cuts to the cash ISO allowance throughout the year, really. It was it was actually expected to happen or expected to be announced by Rachel Reeves at a mansion house speech. On that occasion, the cut was gonna be a lot was was speculated to be a lot heavier.
• 15:04
  It could be it could have been as low as £4,000. I mean, the idea here is which I guess or the the aim for the government, which I think is is a laudable one, is to try and encourage more people to invest. The problem is is, you know, reducing the cash ICER allowance, the silver bullet to achieving that. Probably not. But the the the reports this time around in the lead up to the budget are suggesting that she may cut the cash ISA allowance to £10,000.
• 15:33
  So the overall allowance to 20,000 remains, but you could only stick £10,000 into a cash ISA every year.
• 15:41
  Kyle Caldwell: And ahead of that mansion house speech, which was back in July, the rumor was that the cash ISA allowance will be cut to 5,000, whereas now the reports are that it could be cut to 10,000. I do agree, Craig. It's not gonna be my view is that it's not a potential silver bullet. I think if you've only got your money in cash savings and the the allowance is cut, it's not necessarily gonna incentivize you to then put money into the stocks and shares, Iso version. I think the most important thing is that education is key and the government's increasing efforts around investment education to get across to people the importance of investing for your financial future to get across the it's actually not that difficult.
• 16:28
  And, yes, of course, with investing, it does carry greater levels of risk versus putting your money in a bank or in a savings account elsewhere. But the fact is that over the long term, the history books do indeed show that the best way to potentially grow your wealth over the long term is to invest it. Whereas if you keep it in cash, what happens here is that your money gets eroded by inflation. So if you wanna try and grow your money in real terms and beat inflation, the best way is to invest it. And I do I just think that more needs to be done to get this message out to the wider public to get across the merits of investing and the importance of it.
• 17:11
  And to, you know, to to talk about and educate people on things like the power of investing for the long term and the power of compound returns and how they can benefit you over the long term.
• 17:22
  Craig Rickman: Yeah. And this is clearly something that the government is is looking at. There were some other announcements in the in the mansion house speech around this, So around, you know, changing the narrative around risk warnings when it comes to investing. There's gonna be an an advertising campaign. We've got the targeted support regime, which will be available from April year.
• 17:42
  So there's lots of other things going on, but that's that's where the the, yeah, the the debate is around the the cash ISO limit. Will it make a difference? In fact, we I I polled some II, Interactive Investor, community members from our community app over the summer about what they think should happen to the cash ISO limit, and two thirds said that they think it should stay at £20,000. So these are experienced investors. So the vast majority think it should stay, but it is it's it's a hugely divisive divisive topic.
• 18:16
  And, I mean, there there are other sort of things that the government could look at in in terms of ICEs at the budget, but that's been that's, yeah, that's been the big rumor.
• 18:25
  Kyle Caldwell: And even if the cash ISA allowance is cut, you can still squirrel a lot away and not pay tax. So under the personal savings allowance, if you're a basic rate taxpayer, the threshold is £1,000 before you start paying tax on savings interest. So if you're in a savings account and you're you know, it's paying 4% a year, then you'd need over 25,000 to breach that limit.
• 18:52
  Craig Rickman: Absolutely. Yeah. Yeah. That is that's that's worth bearing in mind. What's also worth bearing in mind if you if you're a high rate taxpayer, your savings allowance is only £500.
• 19:00
  And as we've been discussing, more and more people are tripping into the the higher rate of tax. For an additional rate taxpayer, if you earn more than a 125,140, you don't get savings allowance. It's important things for people to know and appreciate, especially if there are cuts to the cash ISO limit.
• 19:20
  Kyle Caldwell: Let's now move on to the stocks and shares ISA. So I've seen rumors that the chancellor is considering, like, sectioning off a portion of the stocks and shares ISA just to invest in The UK stock market. So I'm just gonna spell out both sides of the debate. So on the one hand, I can I can see why the government is keen to try and increase money going into The UK stock market and UK companies as, of course, this will benefit The UK economy? The fact is pretty much since the Brexit vote, every single month, pretty much, we've seen more money exit UK funds rather than enter UK funds.
• 20:06
  So there's been billions of pounds flooding out of UK funds since then, and a lot of that money has went into global funds that invest in overseas shares. And global funds also typically have some exposure to The UK as well. And, you know, there's also I've seen the argument made the given that we get tax breaks in in ISAs, so the returns that you make, the investment returns, the tax free, that this should make us all a bit more patriotic and wanting to put money into The UK stock market. However, for me personally, I wouldn't wanna be restricted. I'd wanna invest where I see fit.
• 20:48
  I'd wanna invest globally. I'd wanna I wanna achieve global diversification with my own investments, and I think a lot of other people will have the same view. Also, I just think it might be really hard to administer. I mean, how how are you gonna, you know, say say if say if only five say 5 thousands of the 25 of the 20 thousands has to be invested in UK, how is that gonna be policed, and who's gonna police it? So the the way rumors well, not rumors.
• 21:20
  The the the the government was seriously looking into a potential British ISA not too long ago, and that was the idea of the previous conservative governments in which there'd be a separate ISA just to invest in The UK market, the so called British ISA. And the idea here was the yeah. It'd be 5,000. And the concerns with this ISA, though, where the people would only use it if they'd already maximized the 20,000 stocks and shares ISA allowance. So the concerns were, would there be a lot of demand for that ISA?
• 21:58
  However, I do whatever whatever your views are on that, I do think that's a cleaner way to do it rather than section off a part of the existing stock and shares ISA. And as we've spoken about before in a previous episode when we when we examine the the potential British ISA, at the end of the day, you know, if if you're investing in the 4,100, if you're investing in an index fund or an ETF that that's tracking the fortunes of the 100 largest companies that are listed on The UK. The fact is the majority of them are global businesses. They make most of their money overseas. So there are no guarantees that it'll that, you know, it will benefit domestic UK businesses that make most of their money here rather than overseas.
• 22:42
  Craig Rickman: Absolutely. Yeah. Yeah. And it could also make things a bit more complicated or add more knots to the ISA landscape at a time when we really need to to make things simpler and easier for people to understand as well.
• 22:56
  Kyle Caldwell: And in terms of the existing ISA regime, there are a handful of different ISAs, which complicates matters. And there have been rumors of potential changes to the lifetime ISA. So this is the ISA whereby you either invest for your first property purchase or it's used for your retirement. Craig, what are the potential changes on the cards?
• 23:24
  Craig Rickman: So back in January, the treasury select committee started looking at the the lifetime ISA. For quite a long time, people have flagged some some problems with the with the product, some concerns. So, yeah, it's it's a dual purpose ISA. So you can either use the money to buy a first home or you can use it to fund your retirement. And the big the big benefit to the lifetime ISA is that you get a bonus on what you pay in, and that bonus is is 25.
• 24:00
  The maximum you can pay into a lifetime ISA every year is £4,000. So if put £4,000 in, you get an extra thousand pounds. But there are some concerns about how how the product works, whether it's truly fit for purpose. I'll flag the the the two main two main problems with it. The first is that if you're looking to use it or use a lifetime ISA to buy your first home, the maximum property value that you can buy is 450,000.
• 24:29
  That figure has been fixed since the lifetime ISA was launched in 02/2017. So for some people, especially those, you know, perhaps in in London or in the Southeast, the home that they want to buy might be more expensive than that. And so they can still take the money out of the LISA, but this leads us to the second problem with it is that if you access the money from your LISA, which isn't used for either of those purposes, so buying first home or retirement, then you pay a penalty. And the penalty is 25% on whatever you withdraw. So that's on what you've paid in plus any growth.
• 25:05
  So it's highly likely that the penalty will outstrip and and potentially buy sort of a reasonable margin the bonus that you received. And so, yeah, there are there are problems there. I think there has been quite a lot of data showing that, you know, there's been increasing number of people who are, you know, pay paying the penalties on license. So, yeah, it's a it's a it's a slightly confused product. The treasury select committee are looking at it, to scrap it entirely, whether to reform it, which I think is probably the most likely, or whether to keep it the way it is.
• 25:42
  And perhaps we'll get an answer to that on the November 26.
• 25:47
  Kyle Caldwell: So, Craig, we've covered off the rumors regarding pensions and ISAs. Now there are lots of other personal finance releases rumors of potential changes in the upcoming budget. However, I think we would need probably another hour or two to cover them on this podcast. So let's end by focusing on wealth taxes. So while there's never actually been a wealth tax in The UK, there have been rumors that such a policy could be on the cards.
• 26:20
  So unlike capital gains tax, which is paid when an asset is sold at a profit, a wealth tax or the idea of a wealth tax is a one off windfall measure or an ongoing tax based on the value of the assets held even if they're not sold. The good news is that chancellor Rachel Reeves has ruled out a potential wealth tax. However, there have been reports that the government could make further changes to the existing inheritance tax and capital gains tax regimes. Craig, could you talk us through the speculation regarding both of those?
• 27:01
  Craig Rickman: Sure. Yeah. I mean, so those two taxes were were targeted last year. So capital gains tax rates were increased if you were if you were selling shares and other assets. Or they were they were brought in line with residential properties.
• 27:18
  So before that, there used to be different rates of capital gains tax depending on whether you were selling, yeah, shares or other assets or a or a second home. So they were they were brought in line, which was a tax increase for for some investors. And then we had sweeping changes to the inherit ance tax regime affecting farms, businesses, pensions, AIM shares. So so apparently, further reforms to these two sort of wealth taxes or what known as or sit under the capital taxes banner are being considered by the government. One of the rumors around CGT is is is, yeah, is a repeat of of last year, which is to bring capital gains tax rates in line with income tax, which would be a incredibly heavy hike.
• 28:03
  So that's that's being rumored. The in terms of inheritance tax, the rumors are focused on the gifting rules. So at the moment, if you gift certain assets, then provided you survive seven years, that money moves outside of your estate, becomes inheritance tax free. There are rumors that that could be extended to ten years in what would be yeah. I mean, a deeply unpopular move.
• 28:36
  I think any any changes around inheritance tax will always be unpopular as as we saw last year. It's not not that any taxes are are liked. People have a particular dislike for inheritance tax. So anything that, you know, increases the rates, makes it harder to give money, tightens the rules, is not gonna be very popular as we saw, you know, with regards to, you know, the backlash of the reports that we had last year. So so, yeah, I mean, further reforms in those areas are possible, but I think my view is particularly around inheritance tax and the response to to to the reforms at the previous budget, the government might tread a bit carefully in that area.
• 29:18
  Kyle Caldwell: So inheritance tax and capital gains tax, they were the the last two items on our list of things to cover in our preview episode of what may be in store in the budget. However, before I conclude, Craig, I think it's important to stress the importance of not making any knee jerk reactions. At the end of the day, there is a lot of speculation and rumors, but nothing is currently set in stone. And we won't know the items in Rachel Reeves' briefcase until the November 26 when the budget is delivered.
• 29:54
  Craig Rickman: Absolutely. Yeah. And I think that message is particularly important around, you know, things like pension tax free cash if you're thinking about doing doing something about that before the budget. As HMRC and the Financial Conduct Authority recently confirmed or or reiterated, once you've made a tax free withdrawal from your pension, you can't change your mind later. It's a one and done decision.
• 30:17
  That, you know, that doesn't necessarily mean that you shouldn't make a, you know, a tax free cash withdrawal before the budget. There are there are good reasons to do so. You know, you don't you don't like I said earlier, you don't have to take the lot in one hit. But for some people, that's that's the right thing to do if they've got a purpose for the money. But I think, yeah, the the thing to be wary of is if you're making a decision purely based on on the speculation because, yeah, it's it's a decision, especially if nothing happens with tax free cash at the budget, that you might live to regret.
• 30:49
  Kyle Caldwell: And we will, of course, be covering the budgets on ii.co.uk, and we'll also be doing a podcast episode analyzing what has been announced and how it will be impacting the nation's personal finances. But until then, Craig, thank you for your time today.
• 31:06
  Craig Rickman: Thanks a lot as always, Kyle.
• 31:08
  Kyle Caldwell: And thank you for listening to this episode of On The Money. If you enjoyed it, please let us know what you think. You can comment on your preferred podcast app. And if you could leave us a rating or a review, that would be much appreciated as those ratings and reviews are really important to spread the words of the podcast. In the meantime, you can find more practical pointers and analysis on the Interactive Investor website, which is ii.co.uk.
• 31:37
  And, hopefully, I'll see it again next time.