The review of pension allowances as well as the triple lock and an eventual change to the age of retirement for state pensioners are all likely to be included on the list of priorities for the chancellor in the spring Budget coming up next week.
The Chancellor Jeremy Hunt will deliver the fourth annual UK fiscal report for the twelve months, the week commencing Wednesday (March 15).
The Institute for Fiscal Studies has estimated that the chancellor could be able to have an extra £30bn in headroom because of an increase in energy prices as well as lower interest rate expectations which will result in lower taxes and borrowing costs being higher than expectations.
However, massive tax cuts are not likely according to Laith Khalaf, the head of analysis for investment for AJ Bell.
“All eyes will be focused on any small gratification that may emerge from Hunt’s red box,” Hunt declared.
It isn’t a Budget without any speculation regarding what the next steps for the retirement tax system added Dean Butler, managing director, Standard Life.
What are the possible changes on the agenda of the chancellor to aid the UK people?
MPAA
The annual allowance for money purchase (MPAA) is said to penalize people who go back to work or try to build up savings after having used the pension freedoms that were designed.
The MPAA cuts the annual allowance of those who are able to access the tax-deductible earnings from their retirement account by £36,000 and then to £4000.
A letter from the industry, written by AJ Bell and organised by the Lang Cat was sent to the Treasury this week, warning that the penalty is an “clear disincentive” for people who are looking to go back to work, and continue saving for retirement.
“It also risks hindering those who have accessed their pension during a period of financial distress from rebuilding their pot afterwards,” Tom Selby director of the retirement department for AJ Bell, said.
The letter suggested that there should be a change to the MPAA to £10,000.
However, Butler stated that an increase in the threshold could aid, but the benefits is limited to people who have a substantial income.
“Bigger questions have been raised as to whether it’s really health issues, or some people’s relatively good financial position that are keeping older people out of the workforce,” he added.
Lifetime allowance
Another factor that could hinder some people from staying in the workforce is the lifetime pension allowance.
The idea is also viewed as a possible change to the budget.
The lifetime and annual pension allowances, set in the range of £40,000 or £1.073mn respectively are the limits to the amount of money that an individual can put to their pension while receiving tax relief every year.
Lifetime allowances are often cited as the reason behind certain NHS employees leaving the sector.
The study conducted by Wesleyan in the year 2000 found that 5 per cent of NHS nurses, doctors and senior staff had intended to quit or plan to leave the NHS pension scheme forever to reduce tax burdens and a fifth (19 percent) was planning to make a deliberate decision to withdraw and rejoin the scheme as a way to restrict the rate of growth in their pensions.
Butler declared: “In the long-run this is an allowance that really isn’t fit for purpose as an increasing number of people will reach the limit and change is needed to ensure that those who do the right thing and save for their retirement aren’t unduly penalised.”
The new policy could lead to the opposite result to what the government is expecting, according to Jon Greer, head of retirement policy at Quilter.
“If these steps are designed to motivate people to return to work, or continue to work it could result in the opposite effect.
“In fact, it would arguably allow some to retire earlier if they can put more in.”
Jason Hollands, managing director at Wealth administrator Evelyn Partners, pointed out that, in the case of the LTA the growth in investment is also included, meaning that someone who made prudent investments could be punished with a tax bill.
“This has created a disincentive for continued pension saving amongst higher earning professionals and is a factor driving early-retirement decisions at a time when the economy faces the challenge of tightening labour market,” the economist said.
“In particular, the limitations on pension allowances – that have been cut over time, as well in both nominal and actual terms – have caused issues that have been well-documented for the private sector specifically in the NHS where the large defined benefit pensions are in place, which means that some professionals leave earlier or are reluctant to undertake further work.
“But without a rethink, the LTA is becoming a greater issue for those with defined contribution pension schemes who have saved diligently over a long period, and this will only escalate at current rates of inflation. “
State pension age
It is believed that the age of the state pension age is set to rise for the next twenty-five years, and there is a current examination of the age at which state pensions are paid that is being conducted to determine if the present timetable is still appropriate.
The review, made public at the end of December examines whether the rules governing the age of pension are appropriate, in light of the most recent statistics on life expectancy as well as other research.
The life expectancy of people in the UK is declining in recent years, leading some people calling to reconsider the proposed increases in the age of state pensions.
The Department for Work and Pensions will also examine whether it is appropriate to bring forward the date that people can become eligible for state pensions until 2037-39.
Andrew Tully, technical director, Canada Life said these modifications must be effectively communicated.
“DWP needs to learn lessons from the past and ensure anyone within this bracket are told they will have to wait an extra year to claim their state pension,” he said.
The potential for many thousands of pension plans may have to be revised according to him, and he added that for many, the government pension won’t offer the ideal level of living during retirement and the need for other savings will arise.
“Many people will face a challenge to bridge the gap between when they want to retire and when the state pension starts.”
Auto-enrolment
The Minister of pensions Laura Trott backed a private members bill, which could bring about the automatic enrolment program reaching millions more.
A private members bill by M.P. Jonathan Gullis, backed on March 3 by the government and grants two extensions to automatic enrollment which eliminates the lower earnings contribution limit and cutting the age at which you can be automatically enrolled from 22 years old to the age of 18.
With an election just 18 months from now, the chancellor might think about the effect they are having on a lot of people.
The introduction of automatic enrollment was suggested in 2017 during a government review, but no actions has been taken to implement the plans.
The minimum contributions current set to 8 per cent for earnings between £6,240 to £50,270.
These levels are not enough and must be raised in the near future, Selby said.
“However, going too far, too fast would risk causing a damaging spike in opt-outs, particularly with millions of Brits battling against sky-high inflation,” he said.
Butler says it seems like any change in the proportion of salaries paid by employers and employees is out of the question, while inflation is still high.
“Further down the line we’d like to see minimum contributions increase to 12 per cent as contribution levels are the single biggest lever we can pull to reduce under-saving and improve retirement outcomes,” he added.
“The economic forecasts [to be set out] may help inform the debate about when and how quickly contributions should be increased and everyone will be hoping that predictions of falling inflation this year do come to pass.”
Annual contribution – current system (£30,000 earnings)
| Earnings | Qualifying earnings | Personal contribution | Employer contribution | Tax relief | Total contribution |
| £30,000 | £23,760 | £950.40 | £712.80 | £237.60 | £1,900.80 |
Source: AJ Bell
Annual contribution – with lower earnings band removed (£30,000 earnings)
| Earnings | Qualifying earnings | Personal contribution | Employer contribution | Tax relief | Total contribution |
| £30,000 | £30,000 | £1,200.00 | £900.00 | £300.00 | £2,400.00 |
VCTs
The Treasury Committee today (March 10) demanded the chancellor’s clarification on whether the tax breaks offered to Venture Capital Trusts (VCTs) as well as enterprise investment schemes (EIS) are renewed beyond April 20, 2025, the date they’re due to expire.
Within the “mini” Budget last year the then-chancellor Kwasi Kwarteng increased the tax reliefs granted to VCTs and EIS However, the committee has demanded clarification on the extension.
The chair of the Treasury committee, Harriett Baldwin, said that the committee had received an “significant volume” of evidence about the significance of the programs to help businesses expand, and also for companies to think about the future.
“The chancellor needs to provide clarity and certainty on the future of these pro-growth schemes in next week’s budget.”
Baldwin pointed out an email that she got from Hunt earlier this week (March 7) in which she praised the support of the government.
“It is the government’s firm intention to extend beyond the current sunset,” he added.
Some commentators have said previously that VCTs as well as EIS could aid in addressing in addressing the UK’s productivity issues.
Tax thresholds
The Autumn Statement of last this year prolonged the freezing on UK income tax allowances as well as thresholds to 2027/28.
The tax thresholds for income were set to be frozen until 2026 by the previous chancellor, who is now the Prime Minister, Rishi Sunak.
This action, which is regarded as a stealth-tax is likely to have brought greater numbers of people to the tax system for income in the very first instance or into higher tax brackets throughout the years in the face of unprecedented inflationary pressures.
The continued freezing of thresholds for taxation will cause millions to be left without a home Tully said.
“With an election around 18 months away, the chancellor may want to consider the impact these are having on many voters in advance of the next general election.”
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