CHANCELLOR of the Exchequer Rishi Sunak has announced his budget which sets out the economic plans for winter – but what does it mean for your pension?
In today’s Autumn Spending Review, there were very few mentions of retirement and pensions, but there were a couple of announcements hidden in the full budget documents.
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The biggest news is a change to the way pensions tax relief works, meaning a welcome boost for lower earners.
Sunak also unveiled a consultation on the charges cap, to try and boost investment in long-term infrastructure projects.
Here’s everything you need to know about pensions announcements in today’s budget:
Tax relief boost for lower earners
The pensions tax relief system is supposed to mean that for every penny or pound you put away for retirement, the government will top up your savings.
How much tax relief you get depends on how much income tax you pay, meaning middle and higher earners tend to get a better deal.
Someone who only pays basic income tax would get 20% relief from the government, while someone who pays additional rate would get 40%.
But for lower earners who earn less than £12,570, an unfortunate quirk in the pensions system means that many people don’t get any tax relief at all.
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This is because there are two ways that employers can operate workplace pensions schemes, one is called “relief at source” while the other is “net pay”.
For higher earners, net pay works well because your pensions contributions come out of your pre-tax earnings, which means you pay less tax over all.
But for people who earn less than £12,570, it means they don’t get any tax relief at all on their savings.
This is because none of their income would have been taxed anyway, so they don’t benefit from the relief.
By contrast, with relief at source, 20% tax relief is added automatically, meaning low wage workers get a much-needed boost from the government.
Campaigners have been calling for reform for some time now, and Rishi Sunak has now confirmed a new system will be in place from 2024.
The reform will mean that lower earners will get government top-ups to ensure they’re getting the tax relief they deserve.
The government is predicting this could boost pensions savings for low earners by £54 a year on average.
The government says the changes will impact 1.2million individuals, 75% of whom are women.
The top-ups will be paid after the end of the relevant tax year, with the first
payments being made in 2025-26 and continuing thereafter.
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Darren Philp, Director of Policy at Smart Pension, said: “In amongst the high profile announcements was an important change to the Pension tax system that will benefit over a million lower paid people, many of them women.
“By topping up the pensions of lower earners in net pay schemes the government is addressing a gross unfairness in the system. While the introduction of the new system is still some way off, this is a positive step forward.”
Charges cap consultation for workplace schemes
The chancellor also announced that there would be a review of the charges cap for workplace pensions schemes.
In his budget speech he said: “I’m announcing today that we’ll consult on further changes to the regulatory charge cap for pensions schemes – unlocking institutional investment while protecting savers.”
Workplace pension schemes that are used for auto-enrolment are currently subjected to a charges cap of 0.75%.
This was introduced to protect savers from hefty investment fees on their retirement savings, but it did mean that schemes struggled to invest in more expensive asset classes such as infrastructure.
In a bid to increase the money flowing into government infrastructure from UK pension, the government is planning to carry out a consultation on changing the charge cap.
This could mean slightly higher charges for UK savers, though it could also lead to higher returns.
It’s not yet clear what reform could look like, but the budget documents say it “will consider options to amend the scope so that the cap can better accommodate well-designed performance fees to ensure savers can benefit from higher return investments, while unlocking institutional investment to support some of the UK’s most innovative businesses.”
Scrapping the pensions triple-lock
The government announced in September that it was planning to scrap the triple lock and this has been confirmed in the budget costings.
The triple lock usually guarantees that state pension payouts will increase by the highest of inflation, average earnings growth, or 2.5%.
However, the coronavirus pandemic has pushed earnings figures artificially high as many people returned from furlough, so the government has scrapped that element of the lock.
Many people were hoping that the government would commit to an end date for the pause during today’s budget, but the documents only say that it will be in place for 2022-23.
The pause also applies to Pension Credit and survivors’ benefits in industrial death benefit, both of which will increase by the higher of CPI or 2.5%.
Delays to the Pension Credit – Housing benefit merger
The government’s plans to create a new housing element of Pension Credit, replacing pensioner Housing Benefit have been delayed.
The changes were planned for April 2023 but are now intended to take effect in 2025, to align with the full rollout of working-age Housing Benefit into Universal Credit.
Pensions experts call for further reforms
Even though there have been some changes to the pensions systems, many experts are saying that the reforms don’t go far enough, particularly when it comes to protecting lower earners and women.
There is also widespread disappointment that the government has not taken steps to make the pensions system less complex
Two areas that pensions experts are keen the government tackles are the complicated annual allowance, lifetime allowance and Money Purchase Annual Allowance (MPPA) systems.
Under the current rules you can save £40,000 a year into your pension. This allowance hasn’t changed since 2016, despite rising inflation.
You can save up to a maximum of £1,073,100 over a lifetime, which would buy an annual annuity of around £36,000 in retirement.
The MPAA limits future pension contributions to £4,000 gross for those that have accessed defined contribution pension savings, a low limit that pulls a lot of ‘ordinary’ workers into the mix, particularly those that have needed to access their funds in the pandemic.
The Pensions Management Institute’s Lesley Alexander said: “We are disappointed that the Chancellor has again missed an opportunity to make improvements to the existing [allowance] system.
“Having reformed the Tapered Annual Allowance in a previous Budget, with the consequence of reducing the number of people caught by it each year, it would have been logical for Mr Sunak simply to have abolished it altogether.”
Rachel Meadows, head of proposition – Pensions and Savings at Broadstone added: “[There is a] missed opportunity to review Money Purchase Annual Allowance – essentially a stealth tax on ordinary people that might have needed to fall back on their pension savings during the pandemic.
And Steven Cameron, Pensions Director at Aegon said: “At the last Budget the Chancellor introduced a painful freeze to the pensions lifetime allowance. The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 till 2026.
“While this may look high, it is leading to a growing numbers of savers, and not just higher earners, risking breaching the limit. The Chancellor highlighted that higher inflation is with us in the near term at the very least which will further erode the real value of the lifetime allowance. It’s imperative that this freeze doesn’t continue indefinitely.”
There are also widespread fears over potential increases to the age at which people can claim their state pension.
At the moment, people born on or before April 5, 1970 can claim their state pension once they reach 66 years of age.
If you were born between April 6, 1970 and April 5, 1978 you state pension age will be somewhere between 67 and 68 depending on your date of birth – you can find out the exact age here.
For anyone born after April 6, 1978 the state pension age is currently 68, however by 2050 the age could shift up to 69.
Experts warn that the rising age is unfair for people with shorter life expectancies. Life expectancy varies significantly throughout the UK dependent on various factor.
For instance, someone living in the North East has an average life expectancy of 78, compared to 80.9 for someone living in London.
Tom Selby, head of retirement policy at AJ Bell, said: “Prime Minister Boris Johnson used his Conservative Party conference speech to highlight regional differences in life expectancy as a key area of inequality and target for his ‘levelling up’ agenda. Furthermore, we have recently seen a sharp drop in average life expectancy.
In its manifesto, the conservative government committed to expanding auto-enrolment in the ‘mid-2020s’ by reducing the qualifying age from 22 to 18 and making changes to the minimum earnings thresholds.
At the moment, people are only automatically enrolled if they’re older than 22 and earn more than £10,000, which means many part-time workers are excluded.
Even more confusing, you have to earn over the threshold with one individual employer, which means people with multiple part-time jobs are also excluded – even though they earn over the threshold in total.
These gaps disproportionately affect women who are more likely to work part time or have multiple jobs.
Furthermore, contributions are only made on “qualifying earnings” which is income over £6,240. For lower income workers, this means that they’re only getting employer pensions contributions on a small proportion of their salary.
If the government made reforms, it would mean every pound earned would qualify for a matched contribution from employers.
Ian Love, Head of Institutional EMEA & Asia at SEI said: “Auto-enrolment means more people are saving into a pension than ever before. However, the rules mean that the low-paid, those with multiple jobs and the self-employed are excluded.
“Many of those are women, adding to the pension gender gap. We believe this is an opportunity to tackle inequality.”
- Support for older workers
Low pensions savings rates mean more people have to work for longer before their retire. Despite this, the coronavirus pandemic has forced lots of older employees out of the workforce.
Experts are calling on the Chancellor to give more support for older workers – whether that’s help staying in employment or protecting senior benefits such as warm homes allowance and council tax discounts is crucial.
Alistair McQueen, head of savings & retirement at Aviva said: “Saving more and working longer are the two most powerful ways of funding our longer lives in retirement, but the pandemic has driven a loss of 400,000 older workers from the labour market.
“Many will have experienced a hit to their retirement plans. £2bn has been invested in the Kickstart scheme for the under-25s. We must not forget the 10m workers over the age of 50.”
Chancellor Rishi Sunak delivers the 2021 Budget
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