As the post Budget debate and analysis begins, FPC Senior Adviser Nick Evans takes a look at the pensions changes hitting the headlines.
Since “Pensions Simplification” was supposedly introduced in 2006 we’ve seen constant tinkering with the rules around pensions, confusing those trying to save responsibly for retirement and penalising those taking benefits. Austerity has then driven further fiscal tightening with lifetime pension allowances 40% lower in cash terms since 2011.
Calls for a review of the lifetime allowance have been long standing in particular from the NHS as a result of senior consultants leaving service because the pension tax wiped out any benefit of working but no-one expected the allowance would be scrapped!
So how will the pension changes announced today impact on clients and will they have the desired effect of encouraging the economically in-active over 55-year olds back to work?
“The great resignation”
The office of national statistics data highlights in red below the over 50’s exodus from the workforce since the pandemic.
This highlights the impact of ‘the great resignation’ with hundreds of thousands of employees having left the workforce. Whilst a change in attitudes and a desire for a permanent change of pace will undoubtedly have been a major factor for many to access their pensions; others will have been driven by a need to simply get by, without realising this could reduce the maximum they could subsequently save back up again.
Back to workers
That has been addressed to some extent with the increase in funding allowances for those affected increasing to £10,000 per annum. At its previous level of £4,000, it potentially stopped those re-entering the workforce from benefitting fully from any workplace pension that might be on offer.
Increased annual allowance
For those in the fortunate position of being able to fund their pensions to the max – good news with an increase in annual allowances of up to £60,000 from 6th April 2023 and the ability to carry forward unused allowances for up to three years remaining an option.
Tax free cash frozen!
For those with large pension pots who were heading towards a lifetime allowance charge in the future it is good news but don’t get too excited as tax free cash is still going to be linked to 25% of the current lifetime allowance of £1,073,100 so that stays at £268,275 and will be frozen thereafter.
Fixed protection still a benefit
Those who took out fixed protection as long ago as 2012 will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection. They will also keep their entitlement to a higher tax free lump sum.
Expert advice on both funding and accessing retirement benefits therefore remains so we’re pleased to say that financial planners will not be joining the economically in-active any time soon!
In reality however, it is small minority of UK workers and business owners that have access to personalised advice about their finances. Pension rules have tended to change on a yearly basis, typically with special allowances and mitigations which layer on top of other tax rules. National scepticism around pensions is therefore completely understandable which is why any increase in allowances should be welcomed, not only as a political headline but as a renewed opportunity for workers to engage in their financial planning opportunities.
That’s why it’s also good news the government announced an increase in funding to support their “midlife MOT” programme which provides free on-line financial planning and awareness sessions for 50+ Universal Credit claimants; and why we will continue to support financial education programmes in the community and within our local schools.
Finally, the lifetime allowance change has been met with fierce resistance from the opposition who feel that more targeted measures could have been considered so there is still some uncertainty but rest assured we will be factoring all of the changes into clients on-going planning and will comment on further measures of relevance in due course.
In the meantime to read the full Budget click here:
As always do call us for any clarification.