3 retirement changes we’d like to see in the autumn Budget

Funding the pandemic recovery has come with a cost. The Chancellor Rishi Sunak knows tax rises won’t be a welcomed option, but has stressed that public finances must be put back on sustainable footing.

The government has already confirmed that National Insurance is set to increase from April 2022 to help fund the NHS and social care. But what we’d also like to see is the tax system become fairer and simpler. That’s why we’re calling for the treasury to focus on simplicity. To us this could look like permanently cutting the Lifetime ISA (LISA) penalty, scrapping the Money Purchase Annual Allowance (MPAA), and rethinking the rise in the Normal Minimum Pension Age. Below we look at these in more detail.

Although we don’t know what will be announced in the Budget, we’d like to see changes to pension and retirement rules which make it easier for people to do the right thing for their circumstances.

This article isn’t personal advice. If you’re unsure what’s right for your circumstances, ask for financial advice. Tax rules change and benefits depend on individual circumstances.

1. Reduce the LISA penalty

A LISA is a tax-efficient account designed to help you save for your first home or retirement. Under current rules, the government pays a 25% bonus on money put into a LISA. The maximum someone can pay in each tax year is £4,000. Meaning a maximum bonus of £1,000 each year. You can open an account between the ages of 18-39, and then make payments until age 50 and benefit from the government bonus.

While many people have benefited from a LISA, we think there’s always been a key issue. The exit penalty is too high.

As it stands, if you take money out before 60 for anything except buying an eligible first home, you’ll normally be charged a 25% early withdrawal penalty. This is applied to your total withdrawal, so it not only claws back the government bonus, but also taps into the rest of your LISA savings. To help explain, let’s say you paid £1,000 into a LISA, the government will add a 25% bonus bringing the total to £1,250. If you then decided to withdraw the money and trigger the early withdrawal penalty, you’d only get £937.50 in your pocket (£1,250 less 25%).

This can be off-putting for investors, particularly in uncertain times. It’s clear the government recognise this following their decision to cut the penalty from 25% to 20% between 6 March 2020 and 5 April 2021. This gave those affected by the pandemic a lifeline to their LISA savings with only forfeiting the added government bonus.

We think the LISA penalty should be permanently reduced. In doing so, it would remove barriers to investing and in turn should help empower people to put money aside and build their financial resilience.

This would also help support self-employed people, who are keen to use a LISA to save for retirement but are put off due to their fluctuating income. Permanently reducing the penalty would give people more confidence to use a LISA to save for retirement despite ongoing uncertainty. They could withdraw the money in their LISA if they really needed it without being penalised.

Try out our LISA calculator

Find out more about using a LISA for later life

2. Scrap the Money Purchase Annual Allowance (MPAA)

The MPAA was introduced in 2015. It reduces the standard annual pension allowance (which is currently £40,000 for most people), to £4,000 for contributions to money purchase pensions like the HL SIPP. If an investor flexibly accesses their pension and takes a taxable income, they’ll trigger this reduced allowance. It’s not triggered by just taking tax-free cash from a pension.

The MPAA helps to stop people purposefully accessing their pension with the intent to re-invest their withdrawals to benefit from further tax relief. This is known as tax-free cash recycling, which has its own set of penalties.

That being said, we think it adds unnecessary complexity to the system and stops people from continuing to build their pension legitimately once they’ve accessed it. For example, someone who has to access their pension because they’re struggling is effectively prevented from building back a sizable pot once their circumstances improve.

It could be replaced with anti-recycling rules. This taxes the contribution as an annual allowance excess, but only when someone has accessed their pension with the intent to recycle the cash. If there’s no intent to recycle, people can rebuild their pension savings and therefore their financial resilience.

Find out more about pension contributions and allowances

Remember, what you do with your pension is an important decision. We strongly recommend you understand all your options and check that the option you choose is right for your circumstances. If you’re unsure, seek guidance from Pension Wise or take advice.

3. Ditch the Normal Minimum Pension Age increases

The Normal Minimum Pension Age (NMPA) is the earliest age someone can access their pension. It’s only in extreme cases (like serious ill health) that a person can take money from their pot any earlier. The NMPA is expected to increase from 55 to 57 from 2028. But this hasn’t been confirmed yet and we could see this introduced earlier.

In latest consultations, the government has proposed that people might be able to continue to take money from their pension from 55. But only if it’s written into their pension scheme rules. This move raises some concerns for the industry and client outcomes.

Some pension providers offer more than others in terms of investment choice, better service, and retirement options. These proposals could discourage people from shopping around. They could also act as a barrier to people consolidating smaller pension pots with different minimum ages, despite if it’s the right thing to do for their circumstances.

We could see people making retirement decisions based on wanting to withdraw money at age 55. But also limiting themselves to options based on what those schemes offer rather than what’s in their best long-term interests.

It would be a shame for someone to lose out on these benefits just to access their pension earlier.

Before consolidating pensions, make sure you check for loss of valuable benefits or guarantees, or excessive exit fees.

Find out more about consolidating pensions before retirement