Chancellor Jeremy Hunt went further than expected with major pension savings changes in his budget today.
The biggest step was taken when Hunt abolished the restrictive pensions lifetime allowance altogether, rather than raising it from just under £1.1m to £1.8m, as planned .
It also increased the annual allowance on contributions that can be made from £40,000 to £60,000.
The measures are more likely to help high earners who have already built up large pension funds – and aim to keep professionals over 50 such as doctors in work.
But what difference will the lifetime and annual allowance overhaul make and help you one day? We tell you about the Chancellor’s changes to pensions and what this means for you.
Pension overhaul: Chancellor Jeremy Hunt has made three huge changes to how Britons can access their pensions and how much they can save while enjoying tax benefits
What are the budget pension changes in a nutshell?
Chancellor Jeremy Hunt has given top-earning workers a boost by removing limits on how much can be saved in a pension, known as a pension lifetime allowance.
It also increased the amount workers can save in a pension each year while receiving tax relief, known as the annual allowance.
What is the pension lifetime allowance?
This limits the amount people can have in their pension fund without incurring tax penalties, but the figure includes both the money they and their employer have contributed and any growth over the years.
This is not a limit to the amount that can be paid into a pension, as savers can continue to contribute beyond that, but heavy tax burdens will then hit them when they retire.
Any amount above this level considered as income incurs an additional 25% charge and, as a lump sum, a 55% charge – this is on top of normal income tax.
The lifetime allowance was due to be raised to £1.8m in the budget, but has now been scrapped altogether.
Why is the life allowance so controversial?
When the Lifetime Allowance was introduced by Labor in 2006 it was £1.5million, it was gradually increased to £1.8million during the tax year 2010/2011.
However, it was later cut by Tory Chancellors George Osborne and Philip Hammond, falling to £1m in 2017/18.
If the lifetime allowance had increased in line with inflation since 2006, it would now be £2.66 million, according to This is Money’s inflation calculator.
For someone on a maintained defined contribution pension invested and withdrawn at a standard rate of 4% per annum, the lifetime allowance of £1,073,100 is equivalent to an income of £43,000.
Why remove the life allowance from pensions?
The growing compression of a lifetime allowance that has not kept pace with inflation, wage and pension growth has led to unintended consequences.
Higher-earning professionals, including much-needed experienced doctors, are opting to retire early rather than face tax penalties for overspending.
The government wants to keep people in the labor market and has launched a pension sweetener as an incentive.
The changes mean there’s no limit to how much a retirement pot can grow without tax penalties being applied.
What do the changes to the annual allowance mean?
The annual allowance is the lump sum that can be contributed to pensions each year and give rise to tax relief.
It’s not just the money you pay. It includes your contributions, your employer’s contributions and tax relief.
A basic tax relief of 25% is automatically added to pension contributions, so without an employer contributing to a pension someone could pay £32,000 before reaching the current £40,000 cap.
The Chancellor has unveiled plans to increase the annual stipend to £60,000.
The rules are more complicated for high earners, whose annual allowance is ‘reduced’ to £10,000 or £4,000. It is unclear whether this system is being phased out or relaxed.
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.
Will the legal retirement age change?
Ahead of the budget, rumors swirled that the Chancellor could announce plans to raise the statutory retirement age to 68 by 2035.
However, this has not happened – yet.
Nor did it raise the age at which Britons could access their private pensions to 60, as has been suggested in several reports. It is currently 55 and is expected to rise to 57.
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