By Steven Cameron

In Scotland, we usually have two government Budgets each year – one from the UK Chancellor and another from the Scottish Finance Secretary. Last year, Scots had no fewer than what to all intents and purposes were four Budgets – three at UK level and, to round off the year, a Scottish one on December 15.

The Scottish Budget focuses on devolved powers, including the important matter of rates of income tax north of the Border and the earnings bands they apply to.

Many of the tax changes and other measures announced by Jeremy Hunt and John Swinney do not come into effect until April 6. Before then, on March 15, we have another Budget from the Chancellor. So, can we expect anything new for pensions and savings?

As well as supporting economic recovery, the Budget is an opportunity to introduce measures to grow the economy. On January 27, the Chancellor set out his framework for economic growth, explaining specific measures would follow in “Budgets and Autumn Statements in the years ahead”. His speech centred around what he called the four Es of economic growth

– Enterprise, Education, Employment and Everywhere (the last one is the levelling up agenda).

One aspect of the employment pillar is reducing the number of people who are “economically inactive” – not in work or seeking work. This has grown sharply since the start of the Cpvid-19 pandemic and is creating shortages in the UK labour market, limiting growth and potentially stoking inflation. One particular age group under scrutiny is the over-50s, with many individuals retiring early. How might they be persuaded to return to the workforce?

There are many reasons why people stop working earlier than traditional retirement age. Some are down to positive individual choice, while others such as poor health, redundancy or caring responsibilities are often outside the individual’s control.

Finding ways to support those who might prefer to remain in or return to some form of work should be welcomed.

For some, however, the way that pensions tax rules work – and these are set at UK level – can encourage early retirement or discourage returning to work. The pensions lifetime and annual allowances have been cited as reasons for higher earning doctors leaving the NHS. An extra year of benefits in a defined benefit pension scheme, admittedly now rare outside the public sector, can be worth a significant amount and can lead to these limits being broken, resulting in often hefty tax penalties.

The annual allowance, which sits at £40,000, recently made headlines relating to First Minister Nicola Sturgeon. It was reported the extra pension she had built up when converted into a monetary value had exceeded the £40,000 annual allowance in each of the last few years. In such circumstances, individuals can choose to pay the resulting tax penalties themselves or ask their pension scheme if they will cover the costs in return for a reduced pension in future.

So might these allowances be raised in the coming Budget? If so, they would automatically apply UK wide, including to Ms Sturgeon.

But there is another little-known rule that could affect many more individuals, and not just the wealthier. Under pension freedoms, from age 55, anyone can access their defined contribution pension flexibly – perhaps making a withdrawal to cover difficult times during the pandemic or cost-of-living crisis.

But anyone who does so becomes subject to the Money Purchase Annual Allowance and faces a severe cut in how much can subsequently be paid into a defined contribution pension. Rather than the standard £40,000, it falls to £4,000 a year for personal contributions, employer contributions and tax relief combined.

So anyone who has done this and who is considering returning to work could easily find they can’t take full advantage of the pension that comes with that future employment. To me, it would be particularly welcome if this limit were raised, perhaps to £10,000 a year, which would reduce its impact significantly.

Changing these limits would allow more to be contributed to pensions, which, because of pensions tax relief, would mean a little less collected in income tax. There would be less collected in tax penalties for those who breach the limits, but the upside in terms of keeping people across the UK economically active for longer could far outweigh this, including generating more income tax on earnings.

Alongside the four Es of economic growth, might we label the good outcomes from this as the four Gs? Good for the economy. Good for the labour market. Good for employers who can benefit from this group’s skills and expertise. And last, but not least, Good for individuals who will be able to build up more to finance their later retirement and be more financially resilient.

Steven Cameron is pensions director at Aegon.