Changes to pensions in the budget should aim to keep 50-somethings in work longer.
Rumors ahead of March 15 suggest Chancellor Jeremy Hunt could take a ‘carrot and stick’ approach to easing labor shortages, which politicians say are hampering economic growth.
The causes why many older workers leave their jobs are hotly debated and include, among others, pandemic-related health issues, high childcare costs forcing grandparents to step in to help and age discrimination in the workplace.
But on the pensions front, Hunt would consider easing tax restrictions that push the better-off into early retirement, while proposing a rise in the retirement age that would make it harder for the lowest-paid to afford to retire. give up work. We round up the potential changes below.
Retirement funding: Chancellor reportedly considering easing tax restrictions for better-off savers
Lifetime and annual allowances could be reduced
The Chancellor is reportedly considering an overhaul of lifetime and annual allowances as the highest-paid professionals, including much-needed experienced doctors, are opting to retire early rather than face tax penalties for overspending.
There is talk that both allocations will be increased or relaxed in one way or another in the budget.
The LTA has created a disincentive for the pursuit of retirement savings among top earning professionals
Jason Hollands, Evelyn Partners
How do allocations work now? The annual allowance of £40,000 is the standard amount you can contribute to your pension each year and receive tax relief. It includes your own contributions and those of your employer, as well as the tax relief itself.
The rules are more complicated for high earners, whose annual allowance is ‘reduced’ to £10,000 or £4,000.
The income threshold, where people’s annual earnings begin to be calculated for the purposes of pension tax relief, is £200,000.
But the annual allowance is starting to be reduced for people whose adjusted income level – which includes pension contributions – is £240,000.
For those with an adjusted income of £300,000 or more, the reduction will reduce the annual allowance to just £4,000.
Lifetime Allowance or LTA is the amount you can save in a pension and get tax relief in total, and currently stands at £1,073,100.
Jason Hollands, managing director of Evelyn Partners, said: “In the case of LTA, investment growth is included, so someone who has made sound investment decisions may be penalized with a tax burden that many will consider it unjust.”
“This has created a disincentive for the pursuit of retirement savings among higher earning professionals and is a factor driving early retirement decisions at a time when the economy faces the challenge of a tight labor market.
“If we are to have an LTA it is certainly far too low, given that it was £1.8m just 10 years ago and inflation since then has meant that revenues and savings soared.”
STEVE WEBB ANSWERS YOUR RETIREMENT QUESTIONS
Defined Contribution Annual Allowance: Rule Preventing “Pension Recycling” for Tax Gain
The financial industry has launched a concerted campaign to persuade the Chancellor to relax the little-known ‘MPAA’ rule.
This is intended to deter people from recycling their retirement withdrawals into their kitties to get twice the tax relief.
But it’s also a barrier to retirement savings for people who want to return to work and boost their pensions in the process, according to a letter to the Treasury from 17 financial firms and industry groups.
A decision on the MPAA seems less likely after an unpromising response from the Treasury, which said, “The MPAA affects approximately 25% of defined contribution professional savers aged 55 and over.
“The cap is designed to prevent retirees – who have already withdrawn part or all of their pension – from obtaining relief from double taxation by funding continued savings with their existing pension pots, which have often accumulated without any taxation.”
How does it work now? The rule prevents anyone who has withdrawn, beyond their 25 per cent tax-free lump sum, from getting valuable tax relief on contributions worth more than £4,000 a year from that time.
The current MPAA annual savings limit of £4,000 has been in place since 2017, when it was reduced by £10,000.
Chancellor Jeremy Hunt could take a ‘carrot and stick’ approach to easing labor shortages
“There are good reasons to review the rule,” says Dean Butler, chief executive of Standard Life.
“A combination of the pandemic followed by a cost of living crisis means that many people will have dipped into their pensions for short-term purposes.
‘We think an increase in the limit may help, but its benefits will be limited to those with relatively large incomes and bigger questions have been raised as to whether it is really about health issues or the relatively good financial situation of some people which prevents older people from working.
State Retirement Age: Rumors of earlier increase in retirement age to 68
The Chancellor is said to have considered accelerating the raising of the retirement age to 68 by 2035, which would force many people currently aged between 43 and 54 to work longer.
The government has been considering the timing of this change for years, but it needs to make some sort of announcement soon and so may well do so in the next budget.
What are the projects so far? The legal retirement age for men and women is now 66 and between 2026 and 2028 it will increase to 67.
Officially, the increase to 68 is expected to occur between 2044 and 2046, but a previous government review recommended the change be brought forward to 2037-2039.
He then decided to have yet another look, and it is the result of this last examination that is now due.
When will you retire? Raising the retirement age to 68 could be brought forward
“For affordability reasons, the government may argue that the state retirement age should be raised to 68 earlier than currently planned, perhaps in 10 to 12 years,” says Steven Cameron, director of pensions at Aegon.
“Increasing it even earlier just wouldn’t give people enough time to plan ahead.”
“The higher the legal retirement age, the more difficult it will be for some people to continue working until then.
“An increase in the statutory retirement age to 68 could also prompt the government to raise the earliest age at which [private] pensions are available up to age 58. It tends to be set 10 years earlier than the legal retirement age and is already rising from 55 to 57 in 2028, creating huge complexities.
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