Great Britain

5 pension changes in the Budget that could affect your finances

CHANCELLOR Rishi Sunak is searching for ways to balance the books in his impending Budget and a pensions raid could be one area that fixes the government's finances.

The Chancellor is due to deliver his Budget on March 3 and will be under pressure to outline ways of repaying state support during the pandemic.

The Budget is when the government outlines its plans for tax hikes, cuts and things like changes to the minimum wage.

It will be held next month on Wednesday, March 3, 2021, after being pushed back from last autumn.

Pensions put a lot of pressure on the government's finances.

It pays for state pensions as well as providing tax relief that boosts contributions into retirement savings pots.

What is the Budget?

THE Budget is when the government outlines its plans for tax hikes, cuts and things like changes to the minimum wage.

It's different to the Spending Review, which sets out how much public cash will go towards funding certain departments, devolved government's and services, such as the NHS.

The Budget is read out in the House of Commons by the Chancellor of the Exchequer. It will be Rishi Sunak's second Budget as Chancellor.

Mr Sunak's first one in March last year has been dubbed the "coronavirus Budget" after it focused on supporting Brits financially through the crisis, rather than the government's "levelling up" agenda as promised in the 2019 general election.

Normally, the Budget is held once a year but the unprecedented circumstances of the pandemic in 2020 saw Mr Sunak give a "mini-budget" in the Commons on July 8

This makes it a tempting area for Mr Sunak to make savings and raise some much needed cash.

Here are five pension changes that could affect you in the Budget.

Pension tax relief

All pension savers get tax relief on their contributions.

When you put money into either a workplace or personal pension, the government takes what you would have paid in income tax and puts it in your pension instead.

Basic rate taxpayers get a 20% boost and higher earners, those earning more than £50,000, get 40%.

Additional rate taxpayers, who earn more than £150,000, can get 45% relief.

There are rumours each year that this relief will be scaled back so savers only get the basic rate.

There has been no suggestion that Mr Sunak will do this and Laith Khalaf, analyst for AJ Bell, said while it would be a progressive money-raising move, it would be controversial.

He said: “Raiding pensions is politically toxic at any time, but one group of people who would be particularly badly hit by cutting higher rate relief would be doctors, the very people who have been on the front line in the battle with Covid-19

“Trying to cut pension tax relief right now could make Theresa May’s ‘dementia tax’ looks like a long-lived and successful government policy.”

Steven Cameron, pensions director at Aegon, has suggested the chancellor could instead create a flat 25% rate for everyone.

He said:  “One rumour is the Chancellor is attracted to moving to a flat rate of tax relief at 25% rather than topping up individual pension contributions based on the individual’s ‘marginal’ income tax rate.

“This would-be good news for basic rate taxpayers who could receive a larger top-up but not for higher and additional rate taxpayers who’d receive less generous top-ups than currently."

Lifetime allowance

Mr Sunak is reportedly drawing up plans to freeze the lifetime allowance people can have in their pension pot at just over £1million.

The allowance, which limits the value of pension payouts before high tax charges, has risen with inflation since 2018 and is currently £1.073,100.

This includes any workplace and personal pensions but not your state pension.

Those who go over face a 25 per cent tax on any extra savings which rises to 55 per cent if they draw a lump sum.

It would mean around 10,000 people would end up paying more than £22,000 in extra tax by 2024 - netting some £250m for the Treasury.

The move will also affect the 1.2million people projected to exceed the threshold by the time they start drawing down income.

Former pensions minister Steve Webb, now a partner at consultancy LCP, said freezing the limit would hit workers as they earn higher wages during their career.

He said: "Although relatively few people currently have pension wealth worth over £1 million, if the limit is frozen it will gradually bring more and more people in. 

"Senior workers in the public services or those who invest large sums in private pensions and invest them successfully could also be caught."

The allowance had been expected to rise by £5,800 in the next tax year, in line with 0.5% inflation.

Tom Selby, senior analyst for AJ Bell, said: "If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards - and so too would the lifetime allowance under current legislation.

"By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net.

"If the Chancellor does freeze the lifetime allowance at the Budget, savers will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence."

Triple lock

The triple lock is a calculation used to determine how much the state pension rises by each year.

It sees pension payments increase by the higher of:

The government has previously ruled out scrapping the triple lock following suggestions it should be dropped to help pay for the costs linked to dealing with the pandemic.

It was reported last year that Mr Sunak was coming under increasing pressure to tweak the guarantee but the Government has already confirmed it will be used when working out payments from the new tax year in April.

Becky O’Connor, head of pensions and savings at Interactive Investor, said: "The ‘triple lock’ is costly to the Government but its removal could be potentially devastating for tomorrow’s pensioners, many of whom don’t yet know the extent to which they will depend on the state pension for retirement income.

"Millions of people depend on the state pension – many of these are women. It is not generous relative to other countries and while it seems generous compared to other working age benefits in the UK, those campaigning against its protection should be careful what they wish for."

Annual allowances

Up to £40,000 can be put into a pension each year and anything above that is taxed.

There hasn’t been any suggestion that this allowance will be tinkered with.

But Mr Sunak is facing calls to amend the treatment of contributions for when savers start accessing their pension.

The allowance is reduced from £40,000 to £4,000 once a pension is accessed.

It is called the money purchase annual allowance and industry groups such as the Association of British Insurers and firms such as wealth manager Quilter have called for it to be scrapped.

They claim it penalises those who may need to save more or have accessed their pension pot to survive financially during the pandemic.

 Ian Browne, pensions expert at Quilter, said: "If someone over pension age is struggling to make ends meet and wants to access their pension pot, they will no longer be able to benefit from tax relief on any future contributions. Their annual allowance will be reduced from £40,000 to £4,000, severely limiting their ability to save for retirement once they return to work.

"Nobody should be punished for a loss of earnings during the pandemic through no fault of their own."

Auto-enrolment

Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.

But around 2.5million workers are missing out on employer top-ups because they don't earn enough to qualify for a workplace pension, research by NOW: Pensions found.

Staff must earn a minimum of £10,000 a year from the same employer to be automatically enrolled onto the scheme.

Anyone earning less than this has to ask to be put onto a scheme, but only those who earn more than £6,240 will benefit from the top ups.

Providers have suggested the Chancellor could address this in his Budget to boost pension saving.

James Jones-Tinsley, pensions technical specialist at provider Barnett Waddingham, said: "If the government is truly committed to supporting pension saving, it should start by taking a long hard look at its provision for the self-employed.

"This group has been hit especially hard by Covid, and there is little support available for either their short- or long-term financial futures.

"The government should seriously consider introducing auto-enrolment for the self-employed, by utilising the tax and national insurance system to allow an element of self-assessment payments to constitute tax-relievable pension contributions."

Millions of Brits could face interest charges for paying their taxes late.

These are five key dates that will affect your personal finances this February.

Read everything you need to know about the 2021 Budget.

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