Triple whammy of pension BOOSTS rumoured for tomorrow’s Budget
All eyes and ears will be on Chancellor Jeremy Hunt as he delivers the Spring Budget tomorrow, detailing the Government’s objectives and outlooks.
After several cutbacks to pensions and tax allowances over the years, Hunt is expected to announce three major pension boosts as he looks to get over-50s back into work.
- Raising the pension annual allowance from £40,000 to £60,000
- Raising the pension lifetime allowance from £1,073,100 to between £1.5m and £1.8m
- Raising the Money Purchase Annual Allowance from £4,000 to £10,000.
According to Steve Webb, former pensions minister and current partner at Lane, Clark and Peacock, “the combination of changes of this magnitude would be a ‘game-changer’ for the pension options of better paid workers”.
However, he warned that the changes could have some unforeseen consequences.
“Whilst a key theme of the Budget will be a desire to encourage people to work for longer, allowing people to put more into their pension each year could allow some to reach a target pension pot sooner and be able to afford to retire earlier – the opposite of the Government’s intentions,” he said.
Below we take a look at each of these allowances in turn, details about the changes we can expect, and the impact it will have for people saving for retirement.
1) Pension annual allowance
The annual allowance limits the amount of money that can be contributed to a pension without attracting a tax charge. It currently stands at £40,000 for a defined contribution pension scheme and this sum includes personal and employer payments as well as tax relief. For defined benefit schemes, it’s the maximum value of increase in benefits based on a formula.
If you go over this allowance, basic rate taxpayers face a 20% charge, higher rate taxpayers face a 40% charge while additional rate taxpayers will be hit with a higher 45% – designed to remove the upfront tax relief gained on the amount contributed.
Stephen Cameron, pensions director at Aegon, said the annual allowance “has been subject to the most extreme changes and cuts in previous years”.
“Prior to April 2011 it was £255,000, but was cut back to £50,000 on 6 April 2011 and then to £40,000 in April 2014. Had it been increased each year from its peak in line with inflation, it would now be over £367,000,” Cameron said.
He added: “It’s widely accepted that these ‘allowances’, which act as restrictions, can discourage individuals later in their working lives from staying in or returning to the workforce. Any increases to these will be good news and in line with the Chancellor’s aim to get this group off the golf course and back to work. The Annual Allowance is another reason why certain higher paid professionals in the NHS have decided to retire early to avoid paying significant tax penalties.”
For Dean Butler, managing director for customer at Standard Life, increasing the annual allowance by £20,000 to £60,000 “is likely to be welcomed particularly by those looking to catch up on the retirement provision or for those with irregular earnings who are relying on making larger contributions later in their careers”.
Meanwhile, Jon Greer, head of retirement policy at Quilter, said the annual allowance issues “have been plaguing the health service and causing serious retention issues in recent years”, particularly for those in a DB pension scheme.
Greer added: “The Government are under pressure to keep the NHS afloat, and this change may be mainly directed at this group as they are unable to flex their pension accrual in the way a defined contribution pension saver can.”
2) Pension lifetime allowance
The lifetime allowance is the maximum amount you can save into a pension without having to pay an additional tax charge.
It currently stands at £1,073,100 but was hacked from £1.8m in 2012, before being frozen by the then Chancellor Rishi Sunak with this lower figure due to remain until 2026.
Cameron said: “Since then, skyrocketing inflation means the maximum individuals can build up in their pension in real terms has been cut back year on year. While a fund of just over £1m may seem high, more individuals who would not class themselves as wealthy are finding they are reaching the limit. This is most likely if they have a generous final salary pension, which are now mainly in the public sector. It is one reason some higher paid doctors have left the workforce.”
Alice Guy, head of pensions and savings at Interactive Investor, said that lowering and then freezing the lifetime allowance “means that a punitive 55% tax rate, originally intended for the super-rich is catching more and more ordinary pension savers in the net”.
She explained that the lifetime allowance has more than halved in real terms since its introduction in 2006 and would be £2.3m if it had risen in line with inflation. Further, a pension entitlement of around £53,000 (DB pensions) would be enough to breach the allowance.
“This means the 55% tax penalty is catching out hard working doctors, senior teachers and civil servants and encouraging them to leave the workplace. It also has a chilling effect on pension saving, even among those with smaller pots, as many investors worry they could face heavy tax charges in the future if their investments perform well,” she said.
Guy added: “With more of us living for longer we need to have a generous pension system to encourage people to save enough for a comfortable retirement.”
3) Money Purchase Annual Allowance
As above, people ordinarily have an annual allowance of £40,000 or 100% of earnings (if lower) that can be paid into pensions.
However, for anyone who has flexibly accessed their retirement money, the Money Purchase Annual Allowance (MPAA) kicks in as the Government looked to curb double tax relief on these sums deposited.
The MPAA is a restricted annual allowance for those aged 55+ who have released or drawn down some or all of their tax-free cash sum and who have benefited from an income from the remaining drawdown pot. It applies to contributions paid by the worker, an employer or anyone else and was cut from £10,000 to £4,000 in 2017.
Earlier this month, a host of financial organisations submitted a letter to the Treasury calling for the MPAA to be restored to £10,000. Based on reports, the Government may well have heard the requests.
Tom Selby, head of retirement policy at AJ Bell, said the MPAA is “is set at such a low level it risks acting as a significant disincentive to work”.
Selby added: “Given the challenges facing the UK economy this is clearly undesirable, and so raising the MPAA back to £10,000 – the level it was originally introduced at in 2015 – would be a sensible, pragmatic step.”
Becky O’Connor, director of public affairs at PensionBee, added the increase “will help people who may have needed to dip into their pension pots before officially retiring, but who still need to keep building up their pension before fully giving up work” – exactly the people the Government is targeting to push up the workforce.