After the budget, here’s how to hand yourself a better pension
Chancellor Jeremy Hunt’s overhaul of the rules on how much people can stash away in their pensions has been described as a handout for the very richest in Britain.
For most workers, the budget would appear to have precious little in terms of retirement savings. So what do the pension announcements mean for the 99% – and how can you make the most of your retirement plans?
The big changes
The headline announcement was that the pensions lifetime allowance is to be done away with. Previously, it stood at £1,073,100, which meant that if you saved more, you would end up paying tax charges of up to 55% on the excess amount.
From next month there will be no limit on how much people can build up tax-free over their lifetime. Described as a giveaway to the rich, it has been dismissed as being only relevant to a very small percentage of the population.
The second key move was an increase in the annual allowance – how much people can save into their pension pots tax-free every year – from £40,000 to £60,000. This includes contributions by both you and your employer. “Most basic-rate taxpayers can claim a 25% tax top-up on eligible contributions, meaning that, for every £100 you put into your pension pot, HM Revenue and Customs effectively adds another £25,” says Becky O’Connor of PensionBee. If you save more than the allowance, you don’t get the tax relief, which has increased by £20,000.
One significant change for people who are feeling the pressure of the spiralling cost of living is the increase in the “money purchase annual allowance” (MPAA).
This is a limit on how much people over 55 can pay into a defined contribution pension with tax reliefs, once you start drawing an income from your retirement pot. This was £4,000, but has now been moved up to £10,000.
Compared with almost anything else the return on a pension contribution with employer match takes a lot of beating
Steve Webb, partner at LCP
Former pensions minister Steve Webb, now a partner at consultants LCP, says this may help people who have taken money out in order to pay for the rising cost of living.
He says: “The higher MPAA will make it easier for people to build their pension back up if they can afford to, and to benefit from an employer contribution if they are in a workplace.”
What else is happening?
Next month will see a sharp rise in the state pension. About 12.6 million people will benefit from a rise of 10.1% in the amount they get every month: it will be £156.20 a week for those getting the basic pension, and £203.85 a week for those on the new state pension from 6 April.
The rise is some welcome news for the older community, many of whom have struggled with the increase in energy prices. Age UK, the charity for older people, has criticised the chancellor for failing to invest more in social care in the budget.
While the lifetime allowance has been abolished, the limit on how much you can take from your pension pot as a tax-free lump remains the same.
Previously it was 25% of the £1,073,100 lifetime allowance. This will now be limited to £268,275, a “sneaky cut,” according to Alice Guy of website Interactive Investor.
“The cap will now be separate, with the potential that it could be reduced in the future,” she says. “The tax-free lump sum will be frozen in the future at £268,275, so with inflation, that value will be worth less and less over time.
“This may turn out to be a huge disincentive to some pension savers, and it may erode one of the simplest and best-loved pension rules.”
The freeze in personal tax thresholds was announced in 2021, and there was no change in income tax in last week’s budget. Guy says that pension saving has now become more attractive as our tax burden increases. “Paying into a pension is one of the best ways to save paying income tax. Pension tax relief means that it only costs basic-rate taxpayers £80 to pay £100 into their pension, and it’s an even better deal for higher-rate taxpayers, where it will cost £60 to pay £100 into their pension.”
Make the most of your money
While the budget may have been limited in what it did for everyday pensioners, there are ways for everyone to improve their financial status when they retire.
Webb says that anyone who gets a promotion, or pay rise, should review their pension contributions. “It’s easy to just let things tick over, but these may be times when you can afford to save a bit more, and it won’t hurt as much because your total pay is going up.”
He also says people should explore whether their employer will match any increased amount of pension contributions.
“Compared with almost anything else you could be doing with your money – for example, a stocks and shares Isa – the return on a pension contribution with employer match, plus tax relief on your contribution, takes a lot of beating.
“Yet inertia means many people don’t take this up, or don’t even know it is on offer,” says Webb.
Understanding how much you will want to live on once retired is an important step in understanding how much to save. O’Connor says many people will want to have about 70% of their salary in order to have a comfortable retirement.