Less is more
Last week’s minimalist Budget made little reference to pensions, enabling those saving for retirement to breathe a collective sigh of relief.
In setting his sights elsewhere, Philip Hammond has provided some welcome stability to a pension system creaking under the weight of reform.
“Apart from a small increase in the lifetime allowance, the chancellor has left pensions well alone – a move that will be welcomed by many savers,” says Ian Price, divisional director at St. James’s Place. “Tinkering at the margins does nothing to inspire confidence in the pension system, so it is right that he has resisted the urge to meddle again.”
Huw Edwards, director general of the Association of British Insurers, believes keeping the current system in place will provide some welcome stability for pension savers, although says he still sees “strong arguments for a fundamental overhaul of pension tax relief to make it fairer and more sustainable.”
Despite fears that the chancellor would use this Budget to target higher rates of pension tax relief, there was nothing to worry pension savers. Moreover, there was barely a reference to pensions at all – in either his speech or the accompanying notes. Instead, the only notable change was to the lifetime allowance.
Supporting papers confirmed that the lifetime allowance will rise in line with the Consumer Prices Index (CPI) in April 2018, meaning that the total value of pension benefits you can accrue over your lifetime without having to pay an extra tax charge will rise from £1 million to £1.03 million. This is the first such rise since 2010 – a year in which the lifetime allowance stood at a hefty £1.8 million.
“Following a series of reductions, this is good news for savers, even if on the surface the increase isn’t large,” says Kate Smith, head of pensions at Aegon. “A small increase is welcome for those nearing the limit, but this is a complex area and people should seek financial advice to avoid paying unnecessary tax.”
The small increase in the lifetime allowance could produce a moderate tax saving for wealthier savers. For example, if an individual’s pot is worth £1.1m and they were to cash in their entire pension in the current tax year, the excess of £100,000 would be taxed at 55%, assuming they had no lifetime allowance protection in place. However, if the individual takes those benefits on or after 6 April, when the lifetime allowance has risen to £1.03 million, then the tax on the excess would only be £38,500 – a saving of £16,500.
“Taking benefits after 6 April 2018 may help some individuals to reduce the excess tax charge which those with larger pensions can sometimes face,” says Price. “Nevertheless, the slightly increased lifetime allowance doesn’t remove the need to get financial advice.”
“As long as pension pots and accrued benefits from workplace schemes continue to outpace inflation, I would expect the lifetime allowance to become a problem for more and more savers,” he says.
Budget documents also confirmed that the state pension will be increased by 3% under the terms of the triple lock. This ensures that payments increase by whichever of the following is higher: growth in average earnings, CPI or 2.5%.
The full basic state pension, for those who reached state pension age before 6 April 2016, will go up by £3.65 a week in April 2018. The new state pension – for men born after 6 April 1951 and women born after 6 April 1953 – will rise by £4.80 a week, assuming a full national insurance contributions record.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
The opinions expressed by third parties are their own, and are subject to change at any time due to changes in market or economic conditions. The views are not necessarily shared by St. James’s Place Wealth Management.