22 July 2021
The Covid pandemic has undoubtedly been a time of increased government spending. The National Audit Office have created a Covid-19 cost tracker, which claims that the government have spent an estimated £372 billion on the crisis so far.
Additionally, the BBC reports that, from April 2020 to 2021, the UK government borrowed a record high of £229 billion. It’s easy to see why the past year has been so costly. Simply keeping the country moving has proven to be an expensive endeavour.
In order to cover some of these Covid costs, the government is debating the introduction of sweeping pension reforms that could affect you and your savings. These changes may be announced in the Autumn Statement, which is due in November.
While the “triple lock” on pensions is set to be protected, ensuring the steady rise in the State Pension, your savings may still be affected in other ways. Read on to find out more about the changes the chancellor is considering, how they could affect you, and what you should do now.
The 3 possible pension changes
There are three main ways the government are possibly looking to alter the rules around your pension. It is important that you know about these potential changes before they are put into practice and how they could affect you and your money.
1. Lowering the Lifetime Allowance (LTA)
The current LTA is set at £1,073,100 (tax year 2021/2022). This is the total amount that you can build up in pension benefits over the course of your lifetime that will be paid without incurring an extra tax charge.
If you exceed the LTA, you’ll potentially face a tax charge on any pension you draw on the value above the LTA threshold, with the rate of tax determined by whether you draw the benefits as an income or a lump sum.
If you breach the LTA and you choose to take the excess as a lump sum, you will pay a tax charge of 55%. If you receive the excess through any other method, such as regular pension payments or cash withdrawals, your tax charge will be 25% of the excess.
The Telegraphreports that the government is potentially looking to reduce the LTA to either £800,000 or £900,000. This reduction could mean that you may pay tax on more of your pension than you had prepared for.
A reduction of £200,000 in the allowance could leave millions more pension savers worse off. Those who may not have expected to reach the LTA could face additional tax charges to access part of their pension.
Reducing the LTA could therefore have a direct impact on many pension savers.
If you’re worried that your pensions may exceed the LTA, there are a few options available to you. For example, you may be able to apply for “fixed” or “individual” protection, which can protect your LTA at a higher level.
Considering alternative tax-efficient ways of saving, such as ISAs, may also be an option, or equalising pension benefits between spouses or civil partners and planning as a couple could also be beneficial.
Speak to us if you’re concerned about this issue.
2. Changing the rate of tax relief
The government may also be looking to move towards a flat rate of tax relief on pension contributions. The current system calculates tax relief based on your marginal rate of Income Tax, with those in higher tax brackets receiving greater benefits.
Higher- and additional-rate taxpayers currently benefit from tax relief at either 40% or 45%.
Currently, if you’re a 40% taxpayer and you contribute £8,000 to your pension, you would receive basic-rate tax relief of £2,000. You would also be reimbursed an additional £2,000 when you completed a tax return. This means a £10,000 pension saving would only cost £6,000.
The proposed changes could introduce a flat tax relief rate of 20% or 30%. This would significantly reduce the tax relief if you’re a higher earner, meaning you would have to save more to achieve the same level of pension benefits.
If a move to a flat rate would affect you going forwards, it may be worth trying to save as much as you can now using the current rates of tax relief.
Although the Annual Allowance limits the amount you can save tax-efficiently to £40,000 a year (or 100% of your earnings) whichever is lower, you can utilise unused allowances from the past three years.
Additionally, if you’re a higher earner, you could be affected by the Tapered Annual Allowance. Here, if your adjusted income is more than £240,000, your Annual Allowance will reduce by £1 for every £2 of adjusted income above this amount down to a minimum of £4,000.
It means that, if you earn more than £312,000, you can only pay £4,000 into your pension each year and benefit from tax relief. Utilising carry-forward can also be a benefit here.
Of course, if the government decides to implement a flat rate above 20%, this reform could end up benefiting you if you’re a basic-rate taxpayer. A flat rate of 30%, for example, would increase the government contribution for basic-rate taxpayers by 10%.
3. Changing the taxation levels of employer contributions
The introduction of a tax charge on employer contributions to pensions is also being contemplated. While employers must currently pay 3% of an employee’s wages to a workplace pension, this is currently not taxed.
Adding a charge to this could reduce the likelihood of an employer raising the amount that they contribute to an employee’s pension. If you are already receiving contributions above the 3% minimum, then your employer may reduce the amount they contribute if they are facing additional costs.
As a business owner, this may also increase the cost of providing pension contributions for your employees.
Get in touch
If you want to make the most of the current pension rules, or if you’d like to discuss your pension and retirement planning, please get in touch. Email firstname.lastname@example.org or call 0161 8080200.
A pension is a long-term investment not normally accessible until 55 (57 from 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.