Prospects for average income during retirement are becoming bleaker as the government looks to pensioners to balance its stretched public finances.
The Autumn statement revealed a series of stealth tax grabs but pensions emerged remarkably unscathed. The state pension triple lock was retained, and there was no move on pensions tax relief.
Here are some key pensions issues to watch this year from Gary Smith, financial planning director at Evelyn Partners.
1. Pension saving is very attractive at the moment
For those willing to sacrifice immediate access to their savings, private pensions have long held a distinct advantage over most other nest-egg options thanks to the tax benefits.
As contributions are boosted by tax relief (and possibly employer contributions too), pension growth tends to outstrip non-pension saving or investing quite substantially — particularly for higher and additional rate taxpayers, which there will be millions more of in the coming years.
November’s Autumn statement enhanced pensions’ relative attractiveness.
All income tax allowances and thresholds will fall in real terms until 2028 and the additional rate threshold will also fall in nominal terms from £150,000 to £125,140 — the level at which the personal allowance disappears — in April, affecting nearly 800,000 taxpayers.
This has created an incentive to put more money into private pensions as that is one — and in most people’s cases, the only — way to mitigate against encroaching income tax.
Those now earning between £125,140 and £150,000 will suddenly receive 45% — rather than 40% — tax relief on personal contributions once the additional rate threshold is reduced in April, making pension saving even more compelling for those cohorts.
Meanwhile it has been estimated that as many as 2 million people will eventually be subject to the effective 60% marginal tax rate that kicks in above £100,000 as earners start to lose their personal tax-exempt allowance, creating another big incentive to shelter income in pensions.
The tax raid on capital gains and dividends also means that savers who have used up ISA allowances should be more willing to accept the restrictions of pension saving in order to shield their wealth from taxation.
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Additionally, a further incentive for pension investing is that residual assets in modern defined contribution pension schemes can be passed on tax efficiently to beneficiaries.
With the nil rate band for inheritance tax also frozen until 2028, pension saving will be increasingly relevant to those wanting to pass on their wealth tax efficiently.
2. You have until 5 April to use up your annual pension allowance
Savers with personal pensions are typically entitled to make £40,000 a year — or an amount equal to their annual salary if lower — in contributions that will benefit from pension tax relief.
Moreover, if this has been used up it is possible to carry forward unused allowance from the previous three tax years — starting with the earliest year first.
Those who are in workplace pension arrangements will need to clarify with their current scheme if large, one-off, employee payments can be made, because typically the payments are made through payroll deduction.
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For those with personal pensions such as self-invested personal pensions (SIPPs), making large one-off contributions is more straightforward — as long as the saver has done their sums to make sure the annual allowance is not breached.
Those thinking of topping up their private pension should note that the end of the 2022/23 tax year is 5 April, and make plans accordingly.
There is an argument, however, for those earning between £125,000 and £150,000 to defer large contributions until the 2023/24 tax-year to get more tax relief. Then again, it’s not certain that all the tax-relief benefits of pension saving will last forever.
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3. The Treasury could come for pensions next
All personal taxes are effectively being hiked thanks to the freeze on exemptions and thresholds, and the chancellor also took the axe to capital gains tax and dividends tax allowances in the Autumn statement — confirming that the government is targeting savings and wealth for new revenue streams.
If the chancellor gets bad news from the Office for Budget Responsibility (OBR) in the run-up to an expected Spring budget in March, then the perennial threat to the tax-privileged status of pensions could finally evolve into action.
This could come in one of several forms.
The most lucrative for the Treasury, but also the most controversial, would be to hack away at income tax relief for higher earners by cancelling higher and additional rate relief altogether and giving just basic rate relief at 20% to everyone.
Some less drastic modification or harmonisation of relief rates might be more likely, but any such move will be administratively complex as it will probably require taking a spanner to the national PAYE system and company payrolls.
Instead, the Treasury could just reduce the amount of savings that can benefit from tax relief by reducing the annual pension allowance that currently stands frozen at a gross amount of £40,000 for most people.
Restricting tax-benefiting pension contributions would be perceived as affecting only the well-paid who could afford to save such amounts.
But with the duration and costs of retirement rising year by year, such a cull to the annual limit will put a cap on pension saving for many middle-to-higher-income professionals at a time when governments have been keen to encourage private pension saving.
There is evidence to suggest that the lifetime allowance, which is frozen at £1,073,100, is a significant disincentive to staying in work for professionals who have built up large pots, particularly in public sector defined benefit schemes.
Even if no such steps are taken next year, the Treasury will be watching closely as savers are bound to start putting more into pensions to protect their incomes and savings from tax.
This in turn could limit the revenue-raising efficacy of chancellor Jeremy Hunt’s tax grab, leaving pensions standing exposed and vulnerable as one of the last tax "safe havens".
4. Future state pension age could be put back again
It was announced in the Autumn statement that a review of the state pension age will be published in "early 2023".
The pension age was 65 for men and women in 2018, is currently 66, will rise to 67 by 2028, and under current policy will then rise again to 68 by 2037-39. However, reports have suggested ministers want to bring the change to 68 forward further.
Protocol dictates that there should be at least 10 years between the time that the policy decision is legislated and when it takes effect, so that would mean the earliest possible date is 2033.
Together with the rise for the private pension access age from 55 to 57 in 2028, this means those now in their late forties to mid-fifties could have to make substantial adjustments to their retirement strategy and their savings plans, and many are likely to delay retirement.
Analysis has suggested that if the state pension age rises to 68 a year earlier than planned, then the Treasury would save about £10bn.
That fiscal benefit would only accrue for the government in power at the time, and the government of today might be wary of taking unpopular decisions that don’t benefit them.
But previous rises in the state pension age have not been as politically controversial as governments had feared. And announcing an increase in the pension age earlier than expected at the budget next Spring would allow the Treasury to show it was taking hard decisions to improve the public finances.
It might also have been noted in official circles that incentives to delay retirement could help to alleviate one of the key economic challenges facing the UK at the moment — a tight labour market with a high number of economically inactive adults of working age and firms struggling to fill vacancies.
5. The state pension will go up by 10.1% on Monday 10 April
In April 2022, the full new state pension increased by 3.1% thanks to the temporary suspension of the triple lock. It rose from £179.60 to a maximum of £185.15 a week (or £9,628 a year).
Anyone on the basic state pension now receives up to £141.85 a week, up from £137.60.
At the Autumn Statement on 17 November the Treasury confirmed that the state pension would increase in April 2023 in line with consumer price inflation at the September rate of 10.1%. This means the full new state pension increases to £203.85 a week or £10,600.20 over the year. Anyone who reached state pension age before April 2016 will get about £156 a week or £8,100 for the year.
The increase in the state pension takes place on the first Monday after the start of the new financial year, which this year means 10 April.
The value of the state pension should not be underestimated — it would cost about £250,000 to buy an annuity that paid a 66-year-old an inflation-indexed annual income that starts at the level of the current state pension.
While April’s 10.1% increase might be something of a one-off, the operation of fiscal drag is well illustrated by imagining that it isn’t — just two more such increases would take the annual state pension above the frozen personal tax-exempt allowance of £12,570, meaning that all additional income will be taxed.
6. Pensions dashboards are set to light up in April 2023
Despite some hesitancy from pension schemes and providers, the Pensions Regulator has insisted dashboards will finally go live in April — although it seems very probable that not everyone’s information will be on this online hub at that point, and that the rollout could continue well into 2024.
The Pensions Policy Institute has calculated that 3 million pension pots amounting to £26bn in savings have become separated from their owners, and this problem is thought to be accelerating as auto-enrolment means workers accumulate a number of pension pots as they change jobs.
Even if pots aren’t lost it can be difficult to keep track of investments and performance across multiple policies, and the traditional remedy for this has been to consolidate workplace pensions into one or two pots.
If the dashboard system works as intended and gathers all a savers’ pension information in one place even if they have accrued many pots (and this is very much up in the air), it might mean they decide whether to consolidate on purely financial criteria, rather than for administrative simplicity — which other things being equal could be a good thing.
Dashboard or no, those who have several pension pots should make sure they have all their information in place and take an informed decision on whether some or all of them should be amalgamated.