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Pension Budget announcements: Is no news good news?

Despite rumours around tax relief cuts and pension rule changes, yesterday was one of the quieter Budgets from a pension perspective. But what does that mean?

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 changes already announced earlier in the year, it’s understandable that yesterday's changes were only minor. There’s already so much to think about with the pension triple lock being suspended, and let’s not forget the five-year freeze of the lifetime allowance. We recap these pension changes and explore any new ones - explaining what they mean for pension savers and investors.

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

What pension changes were confirmed yesterday?

Workplace pensions

Rishi Sunak confirmed that the government will introduce a system to make net pay workplace pension schemes fairer for low-earning individuals.

Currently, employees contributing to a ‘tax relief at source scheme’ receive a 20% top up on their pension contributions regardless of how much tax they pay. However, those paying to a ‘net pay arrangement’ instead receive a reduction in the tax they pay at their marginal rate. This means lower earners could be missing out. When this change is introduced from 2024-25, low earners making pension contributions to net pay schemes will be able to claim a top-up, with first payments being made in 2025-26. It is expected an estimated 1.2 million individuals could benefit by an average of £53 a year.

He also announced another consultation on the defined contribution (DC) charge cap. You could be affected if you have a workplace DC pension, and you haven’t actively chosen your investments. Your employer or the trustee or administrator of the pension scheme will automatically invest your contributions on your behalf. The charge cap is in place so the annual amount that you’ll be charged for this default investment isn’t too high.

It’s thought that the reform could allow individuals in these schemes to benefit from higher investment returns, as well as providing support for UK businesses, by potentially allowing default funds to invest in things like infrastructure projects.

Normal minimum pension age

Ploughing through the Budget detail, it’s also been confirmed that the government will legislate for the increase in the normal minimum pension age from age 55 to 57 in the Finance Bill. This change will take effect from 6 April 2028.

Finer details on how this change will affect pension holders are yet to be defined. However, current proposals on possible pension age protections have sparked concern from the industry.

Other Budget news, including inflation

What key pension changes were confirmed earlier in the year?

1. The State Pension triple lock suspended

State Pension increases are normally based on the triple lock rule. This means State Pension income rises by the greater of wage growth, inflation (CPI), or 2.5 percent each year.

On Tuesday 7 September, the government confirmed plans to suspend this rule for one year. If the triple lock had not been suspended, pensioners would have been in line for a blockbusting State Pension increase of around 8%. But because of this freeze it will only be increased by 3.1%.

This means that retirees will benefit from an annual boost of up to £288.60 for the 2022/23 tax year. Those who can claim the full State Pension amount will receive £185.15 a week, which is up by just over £5.

2. Lifetime allowance freeze

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 March 2021 Budget the government confirmed that it will be frozen at £1,073,100 until April 2026.

HMRC reported that 7,130 lifetime allowance tax charges were paid in the 2018/2019 tax year, up 100 from the year before. Now that the allowance is frozen it’s likely to catch more people 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’re affected in this essential lifetime allowance factsheet.

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.

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