Chancellor Jeremy Hunt went further than expected with major pension saving changes in his Budget today.
The biggest step came as Hunt abolished the restrictive pensions lifetime allowance completely, rather than raising it from just under £1.1million to £1.8million, as expected.
He also raised the annual allowance on contributions that can be made from £40,000 to £60,000.
The moves are most likely to help high-earners who have already built up sizeable pension pots – and are targeted at keeping over-50s professionals such as doctors in work.
But what difference will the lifetime and annual allowance shake-up make and will they ever help you? We explain the pensions changes the Chancellor has made and what it all means for you.
Retirement shake-up: Chancellor Jeremy Hunt has made three huge changes to how Britons can access their pension, and how much they can save and still get tax perks
What are the Budget pension changes in a nutshell?
Chancellor Jeremy Hunt gave a boost to high-earning workers by scrapping limits on how much can be saved in a pension, known as the pensions lifetime allowance.
He has also increased how much workers can save into a pension every year and still get tax relief, known as the annual allowance.
What is the pensions lifetime allowance?
This limits the amount people can have in their pension pot without facing tax penalties, but the figure includes both the money they and their employer have paid in and any growth over the years.
It is not a limit on how much can be paid into a pension, as savers can continue paying in above it, but hefty tax charges will then hit them when they retire.
Any money above this level taken as income incurs an extra 25 per cent charge and as a lump sum it incurs a 55 per cent charge – this comes on top of normal income tax.
The lifetime allowance was expected to be raised to as high as £1.8million in the Budget but has now been scrapped altogether.
Why is the lifetime allowance so controversial?
When the lifetime allowance was introduced by Labour in 2006 it was £1.5million, this was gradually raised to reach £1.8million in the 2010/2011 tax year.
However, it was then slashed by Conservative Chancellors George Osborne and Philip Hammond, falling all the way down to £1million in 2017/2018.
If the lifetime allowance had risen in line with inflation since 2006 it would now stand at £2.66million, according to This is Money’s inflation calculator.
For someone with a defined contribution pension kept invested and drawn on at a standard rate of 4 per cent annually, the lifetime allowance of £1,073,100 equates to an income of £43,000.
Why scrap the pensions lifetime allowance?
The increasing squeeze of a lifetime allowance that has failed to keep pace with inflation, wages and growing pension pots has triggered unintended consequences.
Higher paid professionals, most notably much-needed experienced doctors, are opting for early retirement rather than face tax penalties for overshooting it.
The Government wants to keep people in the workforce, and has thrown them a pensions sweetener as encouragement.
The changes mean there is no limit to how a pension pot can grow without tax penalties being applied.
What do changes to the annual allowance mean?
The annual allowance is the standard amount that can be contributed to pensions every year and qualify for tax relief.
It’s not just the money you pay in though. It includes your contributions, your employer’s contributions, and tax relief.
Basic rate tax relief of 25 per cent is automatically added to pension contributions, so without an employer paying into a pension someone could put in £32,000 before they hit the current £40,000 cap.
The Chancellor has unveiled plans to raise the annual allowance to £60,000.
The rules are more complicated for higher earners, whose annual allowance is ‘tapered’ down to either £10,000 or £4,000. It is not clear if this system is being scrapped or eased.
The threshold income level, where people’s annual earnings start being calculated for the purposes of pension tax relief, is £200,000.
But the annual allowance starts being tapered down for people with an adjusted income level – which includes pension contributions – of £240,000.
For those with adjusted income of £300,000 or more, the taper will reduce the annual allowance to just £4,000.
Will the state pension age change?
Before the Budget, rumours were circling that the Chancellor might announce plans to raise the state pension age to 68 by 2035.
However, this has not happened – yet.
He also did not increase the age Britons could access their private pensions to 60, as was hinted at in several reports. This is currently 55, and is due to rise to 57.
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