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Autumn Budget 2021 rumours – how to prepare your pension for potential tax changes

Rumours about pension tax relief and lifetime allowance cuts continue to splash the headlines. We offer some considerations to help you make sure your retirement savings are in as strong a position as possible.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

With the UK facing a national budget deficit of more than £300 billion for 2020/21, there will come a point where the government will need to claw back costs.

Rumours include changing pension tax relief and cutting the lifetime allowance. These changes could mean that you end up paying more tax now or in retirement.   

Any changes to pension rules aren’t likely to be announced until the November autumn Budget. It’s not certain what changes will take place, or if there will be any changes at all. But you can prepare your retirement savings, so you’re not faced with any nasty surprises. Here are some options to consider.

This article isn’t personal advice. If you’re not sure what’s best for your situation, ask for financial advice. Tax rules can change, and any benefits depend on your circumstances. If you’re a Scottish taxpayer, different income tax rates and bands apply.

Find out if you're nearing the lifetime allowance

The lifetime allowance is a limit on how much you can build up in your pensions without getting a tax charge. This limit is currently £1,073,100 and it was set to rise in line with inflation. However, during the most recent Budget the government confirmed that it will be frozen at £1,073,100 until April 2026.  

HMRC reported that 7,130 people were caught by the lifetime allowance tax charge in the 2018/2019 tax year, up 100 from the year before. Now that the allowance is frozen it’s likely to catch more in future.   

If you don’t know the total value of your pensions, it’s worth contacting your pension providers to find out. You’ll have a better understanding of how much you’ve saved and whether you’re nearing the limit.

You can learn more about the lifetime allowance, including the calculations you’ll need to work out if you could be affected in this essential lifetime allowance factsheet.

What if there are changes to the lifetime allowance?

There are rumours which suggest that the lifetime allowance might be cut to £900,000 or £800,000 to help recover the cost of the pandemic.

When the lifetime allowance has been reduced before, pension investors with larger funds have been able to apply for protection. They could choose to fix their lifetime allowance at a higher amount, meaning they’d be less likely to end up with a tax charge or at least reduce the amount they’d pay. Remember though, the same protections we saw previously might not be available again in the future if there were any changes.

If you’re nearing the lifetime allowance, or you’re worried about any changes, you could consider other options.

You might want to think about making the most of your ISA allowance. You can pay in up to £20,000 every tax year.

Or you could consider making a gift to a spouse or loved one by paying into their pension.

Saving into a pension on behalf of someone else won’t affect your lifetime allowance, or how much you can save into your own pension. You can pay in up to the amount they earn. Or if they’re a non-earner you can pay in up to £2,880 and they’ll benefit from a 20% tax relief top-up from the government. Remember though, once the money has been gifted, you have no further right to it.

More on pension limits

Get advice when it matters most

If you’re nearing the lifetime allowance, you could think about getting financial advice. Advice from an experienced professional could be invaluable – if you get things wrong, you could end up with a hefty tax charge. Our advisers will work with you to put together a tax-efficient plan based on your individual circumstances.

If you’d like to explore the possibility of taking advice, the first port of call is our advisory helpdesk. They’ll explain what benefits you could gain from taking financial advice and how much it will cost, depending on the level of advice you’re interested in taking. When you’re ready, they’ll match you with an adviser. Our advisory helpdesk won’t give you personal advice during the initial call, and you’ll be under no pressure to go ahead if you don’t think it’s worth it.

Book a call back

Make sure you’re saving into the most tax-efficient account

Under current pension and Lifetime ISA rules, the most tax efficient way to save for retirement depends on how much you earn and whether you qualify for a workplace pension (as well as the specific rules of the scheme).

If you have a workplace pension, this is normally the most tax-efficient way to save. That’s because your employer is usually legally required to add money to a pension on your behalf. The government will also add money in the form of pension tax relief. You could also save National Insurance contributions if your employer allows you to pay via a salary sacrifice arrangement.

More on pension tax relief

Once your employer is paying in the maximum to your workplace pension, or if you’re not eligible for a workplace pension, the next best way to save for retirement depends on your earnings and your age. If you earn £50,270 or less, then a Lifetime ISA (LISA) could be more tax-efficient than a personal pension.

If you’re aged 18-39 you can open a LISA. You can then invest up to £4,000 every tax year as part of your £20,000 ISA allowance, and you’ll get a 25% bonus up to £1,000 each time until you’re 50. Then the money you withdraw from age 60 is completely tax free.

The LISA bonus you get from the government is effectively the same amount you’d receive as basic-rate tax relief in a pension. The difference is you can take money out without paying tax. Whereas with a pension only up to 25% is normally tax free, although you can make withdrawals from age 55 (57 from 2028). You should factor in what age you’d like to start accessing your money when deciding what option is best for you.   

If you’re thinking about using a LISA to save for later life, you’ll need to keep in mind that:

  • A LISA might not be enough as you need to be saving around 12.5% of your salary each year to maintain your standard of living in retirement. So you might want to use a LISA alongside your pension.
  • Withdrawals from a LISA before age 60, which aren’t for an eligible first home purchase, will have an early exit penalty of 25%. So, you could get back less than you put in.
  • Any savings outside a pension (like in a Lifetime ISA) could also affect your entitlement to means-tested state benefits.

More on Lifetime ISA for retirement

If you earn more than £50,270, a pension could be more tax efficient. As a higher earner, you’ll get an extra benefit by adding money to a pension. You can claim up to an additional 25% (a total of 45%) in pension tax relief on anything you pay in – subject to certain limits. For example, if you’re a higher rate taxpayer, a £10,000 pension payment could cost you as little as £6,000. Additional rate taxpayers can claim up to an additional 25% (a total of 45%).

Tax relief calculator

Download LISA vs pension factsheet including examples

What if there are changes to pension tax relief?

We can’t be sure if there will be any change. But if there is, the likely option could be to remove tax relief at your marginal rate and replace it with a flat rate of relief for everyone.   

It’s expected this could be somewhere around 25% or 30%. If it does change to a flat rate of this level, then a LISA will become the most tax-efficient option for the majority of those eligible – providing LISA rules don't change. But you’ll still need to think about any employer contributions or salary sacrifice first.

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    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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