Four ways Rachel Reeves and her new sidekick plan to scalp YOUR pension: JEFF PRESTRIDGE

Here we go again. Less than three months after Rachel Reeves’s calamitous Budget, the alarm bells are ringing shrilly. Labour is eyeing up our pensions.

A combination of factors has got me worried. First, Labour’s grand plan for economic growth looks firmly stuck in the mud.

While the Chancellor argues that the seeds for growth are being sown, the markets tell a different story. They remain unconvinced, as evidenced by the high cost of government borrowing.

Maybe a cut in interest rates next month will take the heat off Ms Reeves, but it looks likely that the Chancellor will have to go back to her abacus sooner rather than later. 

That will probably result in big spending cuts or further tax rises – maybe both.

In recent days, the focus has been on a possible axing of the triple-lock guarantee governing annual increases to the state pension – a mechanism that ensures it rises each year by the higher of 2.5 per cent, growth in average earnings or inflation.

This speculation has been triggered by a number of events:

• The arrival at the Treasury of Torsten Bell, an individual who, in his past life as the boss of the Resolution Foundation think tank, questioned the sustainability (and fairness) of the triple lock.
• An editorial in the Financial Times urging Ms Reeves to makes savings in politically sensitive areas including the triple lock.
• An array of politicians (even the leader of the Tories) arguing that the guarantee cannot be kept indefinitely.

Yet I am convinced that the assault on pensions (and pensioners) will not just revolve around the emasculation of the state pension.

If spending cuts do not plug gaping holes in the Government’s finances, Ms Reeves could well take her garden shears to the tax breaks we enjoy by using pensions to save for retirement.

In the run-up to last October’s Budget, speculation ran rife when it came to the possible pension changes Ms Reeves was contemplating. Infuriatingly, she refused to nip most of these rumours in the bud.

Maybe it was because she didn’t want to say anything that would make it more difficult for her to introduce pension cuts further down the line.

But Mr Bell’s gatecrashing of the Treasury party as the new pensions minister now makes cuts a near certainty. Given his fervent view that the current pension regime unfairly favours the wealthy, I imagine that he is itching to get his hands on our pensions.

Mr Bell now has the chance to impose his pension prejudices on Ms Reeves – and, in turn, on the nation – rather than merely write about them in think-tank reports. God help us.

Any draconian changes could be announced as early as March if Ms Reeves is forced into an emergency mini-Budget. Or they could wait until October when the Chancellor presents her annual Budget.

Here are the pension tricks that could be up Mr Bell’s (and Ms Reeves’s) sleeves – and the steps you can take to protect your retirement savings from them…

Trick 1: A cut in the annual allowance  

Although Mr Bell hasn’t opined on this yet, the annual amount (allowance) that you can contribute into a pension before you start paying tax on it could well take a cut. 

For most people it stands at £60,000, although high earners are subject to a tapering in this allowance.

I am sure most Labour supporters and Treasury officials consider £60,000 to be too generous – especially when it is also possible to ‘mop up’ unused annual allowances from the previous three tax years under ‘carry forward’ rules. Generosity to the power of three.

A cut in the £60,000 allowance to £40,000, for example, would be easy to administer, unlike some of the other pension changes that Mr Bell put forward while at the Resolution Foundation. 

So, it’s a simple ‘trick’ for Labour to pull. The Government could also combine this with the axing of ‘carry forward’.

How to beat it: Use as much of the current £60,000 annual allowance as you can while it is still around. The carry forward rules give you the opportunity to make a large one-off pension contribution. So, if you have the financial firepower, consider it – but only after taking professional advice.

Under fire: Chancellor Rachel Reeves argues that the seeds for growth are being sown for growth – but the markets tell a different story

Trick 2: Clampdown on tax-free cash     

Currently, if you save into a pension fund, you can usually take tax-free cash once you hit the age of 55 (57 from April 2028).

For most people, they are restricted to taking 25 pc of their pension fund value subject to a maximum of £268,275.

Mr Bell has strong views on tax-free cash. Back in 2019, he proposed capping the tax-free lump sum at £40,000, ‘raising £2 billion a year [for the Treasury] while leaving three quarters of future pensioners unaffected’.

Although the Resolution Foundation didn’t call for a cap ahead of last year’s Budget – it merely said that ‘ideally the tax-free lump sum would be diminished’ – the Institute of Fiscal Studies put its cards on the table by calling for a £100,000 cap.

Ms Reeves refused to quell speculation that a reduction was coming, triggering some people to access their tax-free cash when they didn’t really need to. So, it came as somewhat of a blessing when the Chancellor left the cap on tax-free cash untouched.

Yet Mr Bell’s presence in the Treasury puts a reduction back on the agenda.

How to beat it: For the time being, there is no need to take tax-free cash just because a reduction might be around the corner.

But if you are at a stage of your life where having access to tax-free cash is towards the top of your financial agenda – a result, for example, of retirement creeping up on the horizon – it will pay to take quality financial advice. 

A good financial adviser (there are plenty around) should be able to help you work out when it is best to take your tax-free cash by considering your plans for the future and your finances in their entirety.

It’s called holistic financial planning – embrace it.

Trick 3: Reform of tax relief 

At the moment, pension contributions benefit from tax relief, which means they are tax deductible. The amount of relief is determined by how much income tax you pay.

For basic-rate taxpayers it is 20 per cent, while higher and additional-rate taxpayers (earning more than £50,270 and £125,140 respectively) enjoy 40 and 45 per cent relief (the relief regime differs slightly in Scotland).

This means that a £100 contribution into a pension currently costs a basic-rate taxpayer £80, while for higher and additional-rate taxpayers, the cost is £60 and £55.

Six years ago, Mr Bell said that there was ‘a well-trodden case for completely reforming pension taxation, such as moving to flatter rates of tax relief’. You can understand why a socialist like Mr Bell would advocate this.

For example, a flat rate of 30 per cent would give low earners a better pension deal while hitting ‘wealthy’ earners with an effective 10 or 15 per cent levy on their pension contributions.

Mr Bell has said nothing since to contradict his preference for a tax relief system skewed to helping the least well-off to save.

But the Resolution Foundation report published ahead of last October’s Budget (and after Mr Bell had exited the think tank to start his campaign to become a Labour MP) wasn’t as effusive about the idea.

While stating that reform of upfront tax relief had ‘merit’, it acknowledged that there were ‘important counterarguments’.

The prime one, which it tucked away in a footnote, is that a 40 per cent taxpayer would be penalised with a 10 per cent levy while saving, yet potentially face the full brunt of 40 per cent income tax on their retirement income. In other words, being taxed twice. This is on the basis of 30 per cent tax relief.

The punishing impact of flat-rate tax relief on the ability of higher and additional-rate taxpayers to save for retirement cannot be overestimated, as figures calculated by wealth manager Evelyn Partners for the Mail confirm.

It calculated the pension fund that different taxpayers, currently aged 25, could build from scratch under the current tax relief regime.

The ‘people’ selected were a basic-rate taxpayer earning £28,000, a higher-rate taxpayer (£55,000) and an additional-rate taxpayer on a salary of £130,000. It then did the same calculations based on a flat 30 per cent rate of relief.

Assuming annual contributions of 8 per cent (3 per cent employer, 5 per cent employee), with the tax relief reinvested back into the pension, the 25-year-old basic-rate taxpayer would build a fund under the current tax relief regime of £346,660 by 65. 

But with 30 per cent relief, this would jump by £34,670 to £381,330.

In contrast, the higher-rate taxpayer’s future pension pot would shrink by £68,102 to £612,850, and the additional-rate taxpayer would lose a massive £284,450. For all the calculations, Evelyn assumed annual investment returns of 6 pc.

How to beat it: Higher and additional-rate taxpayers should maximise their pension contributions in case tax relief becomes less attractive.

As I have already said, the annual amount that can be paid into a pension is currently up to £60,000 dependent on your earnings. 

You can also utilise unused annual allowances from the previous three tax years under the ‘carry forward’ rules. But do be sure to take professional advice.

Although basic-rate taxpayers might be minded to reduce pension contributions until they can benefit from a higher flat rate of tax relief, it’s not a wise strategy.

Pension tax relief is as close to free money as you are likely to get from the taxman. Take advantage of it.

Threat: If spending cuts do not plug gaping holes in the Government’s finances, Ms Reeves could well target the tax breaks we enjoy by using pensions to save for retirement

Trick 4: Tweaks to Inheritance tax

Mr Bell already has one pension victory under his belt – and that is Ms Reeves’s decision last October to subject unused defined contribution pension pots to inheritance tax (IHT) when someone dies aged 75 or over.

It’s a move the Resolution Foundation called for ahead of last October’s Budget, and the Chancellor bit. 

The change won’t kick in until April 2027, but it has sparked widespread anger, with campaigners accusing the Government of undermining confidence in long-term savings and imposing a retrospective tax.

Under the proposals – and they are being consulted on – spouses and civil partners will continue to inherit tax-free any money left in a defined contribution pension by their loved one.

And, as now, they will pay income tax on any subsequent withdrawals they make from the pension pot if the deceased was aged 75 or over.

But unused pension pots left to children and other beneficiaries will be potentially liable for 40 per cent IHT – as well as income tax.

The impact is financially nuclear.

How to beat it: There are ways people with big pension pots can mitigate this.

You can draw down on the pension, reducing its value ahead of a IHT hit. These withdrawals will incur income tax of up to 45  per cent. If tax-free cash has yet to be taken, income tax will not be a problem.

This sum could be gifted to a child – with no IHT payable provided you live for another seven years. Even if you don’t survive the full seven, the gift will attract a lower IHT rate from year three.

Regular pension withdrawals could also be used to fund gifts using the ‘normal expenditure out of income’ rules.

These gifts are exempt from IHT, but the rules are tight – they must not compromise your standard of living.

Other measures include the purchase of life insurance (written in trust) to meet the tax bill. You pay the monthly premiums until you die (for ‘whole of life’ insurance) and then the proceeds are used to pay the IHT bill.

Trick 5: Public sector pensions 

Labour could save the public purse a small fortune if it was really brave and said that, at some point soon, public sector workers would no longer be able to contribute to gold-plated (and incredibly expensive) defined benefit pension plans.

Instead, like most workers in the private sector, they would contribute to a defined contribution plan where the pension is not determined by a mix of years worked and salary – but by the whim of the stock market.

It’s a pension trick, sadly, that Labour will never pull – even though it makes great sense.

Finally, a trick you can use…

Please (please) use your annual Isa allowance. Before April 5, you can put £20,000 into an Isa and the savings or investments you hold in it will grow tax-free. You can then add another £20,000 in the new tax year commencing April 6.

For children, you can squirrel away £9,000 this tax year and another £9,000 in the new one.

Not even Mr Bell, nor Ms Reeves, would dare touch these savings diamonds.

• The Daily Mail has produced the complete guide to accessing your pension, written by Money Mail editor Rachel Rickard Straus. To request your free copy or for more information on how you can maximise the return from your pension, call freephone 0808 303 7283 or visit mailfinance.co.uk/retirement