The chancellor has stated an increase to some yearly allowances and also a removal of the lifetime cap on tax-free pension savings.
Although it is unclear how many people will benefit, the measures are a cornerstone of the government’s strategy to reintegrate older people into the workforce. We took a look at changing pension rules.
Changing Pension Rules – Lifetime Allowance
The maximum pension savings that an individual can accumulate over the course of their employment without incurring additional tax is this amount. The existing £1,073,100 cap was supposed to be in place until 2026.
There were rumours that the government will raise it to £1.8m. Chancellor Jeremy Hunt stated that the provision would be completely eliminated in the Budget.
Before the complete elimination of the allowance in 2024, there will be an elimination of the charge starting on April 6, 2023.
For private pensions, the current allowance is applicable. (defined benefit and defined contribution). A government payout, the state pension, is not part of this.
Changing Pension Rules – Other Changes
The annual pension allowance is the most money that you can contribute to a private pension each tax year without incurring a penalty. Right now, it is £40,000.
According to Mr. Hunt, starting on April 6, this will rise by 50% to £60,000. If you exceed the allowance, additional charges will follow. Also changing is the annual money purchasing allowance.
This all applies to people who have begun taking some of their defined contribution pension. But also who want to keep working and increase their savings.
Prior to a tax penalty, the limit is currently £4,000 per year. However, starting on April 6, Mr. Hunt will more than double that to £10,000 per year.
Changing Pension Rules – Potential Benefits
According to the Institute for Fiscal Studies, both the lifetime and annual pension allowances have been reduced since 2010, adding an additional £8 billion in taxes for the government. (IFS).
Removing the lifetime pension allowance, according to the chancellor, would prevent other professionals from taking early retirement and retain senior doctors in the NHS.
But he was unable to estimate how many employees would stay on.
From 2025 to 2026, eliminating the lifetime allowance is anticipated to cost the government roughly £800 million year, whereas raising the annual allowance would cost about £300 million annually.
Both initiatives, according to the OBR, the government’s independent economic forecaster, are expected to boost employment by 15,000 people.
However, the IFS labelled that estimate as “optimistic” in its evaluation of the Budget. They stated that the adjustments were unlikely to have a significant impact on the number of people in the workforce.
State Pension
Unlike a private pension, the state pension is a monthly payment. It is made by the government to people who have reached the qualifying age. They must also have paid enough national insurance contributions.
In November, the government confirmed that the state pension will go up by 10.1%. This is in line with September’s Consumer Prices Index (CPI) measure of inflation.
From April 2023 it will be worth:
- £203.85 a week (up from £185.15) for the full, new flat-rate state pension (for those who reached state pension age after April 2016)
- £156.20 a week (up from £141.85) for the full, old basic state pension (for those who reached state pension age before April 2016)
Pension Age
The government says 12.4 million people currently receive the state pension. Men and women born between 6 October, 1954 and 5 April, 1960 start receiving theirs at the age of 66. But for people born after this date, the state pension age is gradually increasing to 67 by 2028 and 68 by 2046.
