Changes to pension rules to encourage over-50s back to work stole the headlines in the chancellor’s Spring Budget on 15 March. We look at how they could impact your retirement.
Leading up to the Spring Budget it appeared there was little scope for headline-grabbing policy interventions by Chancellor Jeremy Hunt, who has consistently maintained that “the best tax cut right now” is ensuring that inflation comes tumbling down in 2023. The Bank of England has increased the base interest rate 11 times in a row to achieve that goal, and the government doesn’t want to risk stimulating growth too soon by putting more money into people’s pockets.
Helpful to the government’s position has been the emergence of a better than expected economic outlook since the New Year. UK GDP grew 0.1% in the three months to February and revised ONS estimates now put monthly GDP at 0.3% above pre-Covid levels rather than 0.2% below. This improved outlook, Hunt noted in April, means the UK is now set to avoid recession.
If the UK is to grow faster, however, Hunt and prime minister Rishi Sunak know they need to reverse the exodus of skilled workers from the UK workforce over the past few years. A parliamentary report in December stated that economic inactivity has increased by 565,000 people since the start of the Covid pandemic, driven mostly by an increase in early retirement.
It was in this issue, therefore, that Hunt decided to pull his rabbit from the hat. While he had been expected to increase the pension lifetime allowance from £1,073,100 to encourage over-50s back to work, Hunt went much further and abolished the allowance altogether, with the rules to be introduced over the current and next tax years. If that wasn’t enough, he also increased the annual allowance, which is how much you can save towards your pension each tax year without a tax charge applying, from £40,000 to £60,000.
Previous reductions in the lifetime allowance had disincentivised higher earners from saving into their pension to avoid a tax charge of up to 55% on their retirement pot. In the worst cases, it encouraged workers whose skills are crucial to the economy and even the NHS to retire sooner than they otherwise would have done. If abolishing the lifetime allowance works as intended, it will flood skills back into the workforce while also simplifying pension saving for everybody else.
“I’ve already found through conversations with clients that a lot of people are open to paying more into their pension,” says Karandev Digpal, Independent Financial Adviser at Ascot Lloyd. “It has made people on the cusp of retirement or already retired consider working longer to contribute more to their pension. People who had stopped contributing because they thought they would hit the lifetime allowance or were already at the lifetime allowance cap, have an opportunity to invest more to have a more secure retirement. ”
Further changes to pension rules will mean the Tapered Annual Allowance, which is the income threshold at which your annual allowance starts to reduce by £1 for every £2 you earn (including employer's pension contributions), will increase from £240,000 to £260,000. The tapering will stop at £360,000, meaning even the highest earners will retain an annual allowance of £10,000.
To encourage people who have already started accessing their pension to return to work, the Money Purchase Annual Allowance will also increase from £4,000 to £10,000. The amount you can take from your pension without paying tax, however, will remain fixed at 25% of the former lifetime allowance, capping tax-free lump sums to £268,275 no matter what a pension grows to.
Sting in the tail?
The rabbit in the chancellor’s hat on Spring Budget day is undoubtedly a very welcome boost for pension savers who previously worried about treading past the lifetime allowance. Pension schemes are a tremendous vehicle for growing your retirement savings in a tax-free wrapper, and the government will uplift personal contributions by 20% and higher-rate and additional-rate taxpayers can claim back even more in their tax returns and, as an added incentive, money held in your pension is usually exempt from inheritance tax.
However, the ability of any government to alter pension policy, with the backing of parliament, has caused hesitancy among some pension savers. The Labour Party, which is currently leading in the polls for the next general election, announced after the Spring Budget that should they be elected they will immediately reinstate the lifetime allowance. As the lifetime allowance changes are being introduced over two tax years. This current tax year seeing all the current lifetime allowance rules remain in place, the change is the 55% charge is reduced to 0%. It is only in the 2024/25 tax year that the lifetime allowance is removed from legislation. The manner in which this is to happen is so unclear, to the extent HMRC is looking to a working group to explore how this can be achieved. There is scope for the cancellation of this change or reinstatement of existing legislation or indeed a completely new set of rules. This could leave those who choose to take full advantage of the rules changes for the 2023/24 tax year in a tricky situation.
When the lifetime allowance has been reduced in the past, people who were already over the reduced limit were able to apply to HMRC for some transitional protection. It's currently unclear, however, if this would be offered again should the lifetime allowance be reinstated in the future.
“I have already been having conversations where people are worried about throwing too much into their pension in case the next government reinstates a new, lower lifetime allowance,” says Digpal. “The ability of governments to change pension policy whenever they like does make retirement planning very difficult, which is why the help of a financial adviser can be so valuable. Maximising all current reliefs and allowances is important to achieving the retirement you want.
“Typically I recommend to all of my clients to maximise every allowance that is available to them, whether it's income tax, capital gains, ISAs pensions. At the end of the day, we can’t predict the future. We can only plan with what's in front of us and work with what we know. What we know right now is the government has provided a big incentive to save more money into your pension without paying tax. If you can take advantage of that it can really bolster your retirement.”
If you’d like to speak with one of the trusted Independent Financial Advisers at Ascot Lloyd about how any of the announcements in the Spring Budget will impact you, and how to build the right pension plan to meet your retirement goals, request a call back.