Pensions are in the spotlight as we approach the Autumn Statement on 30 October 2024. Reforms to certain pension allowances are a possibility, although analysts are widely pointing out the political costs involved for the government.
Regardless of what the Chancellor decides, it is vital that taxpayers understand their rights under existing rules. Below, our Carlisle financial advisers outline four key aspects of current pension allowances to know in 2024-25.
We hope these insights are helpful. Please contact us for more information about pension allowances or to speak with a financial adviser:
t: 01228 210 137`
e: [email protected]
#1 Tax Relief
A UK pension is a very tax-efficient “vehicle” for saving and investing towards retirement. Not only are your capital gains, dividends, and interest tax-free, but your contributions can also enjoy tax relief equivalent to your highest marginal income tax rate.
For instance, a basic rate taxpayer would pay 20% income tax on their earnings between £12,570 to £50,270. However, by contributing to a pension, the money that would have gone to the UK government in tax goes to the taxpayer’s retirement fund instead.
This means that a higher-rate taxpayer gets 40% tax relief. However, there has been speculation prior to the Budget that the Labour government are considering changing tax relief—e.g., introducing a “flat rate,” perhaps 20% or 30% for everyone.
#2 The Annual Allowance
Under the previous Conservative government, the Annual Allowance was increased from £40,000 to £60,000.
This represents the maximum amount a taxpayer can normally contribute to their pensions, and receive tax-relief, in a given tax year without a tax charge (unless “carry forward” rules can be used). If a taxpayer’s earnings are below £60,000, then this will be their Annual Allowance instead.
Pundits are largely sceptical that Labour will change the Annual Allowance rules. Cutting it would allow the government to raise much-needed revenue to plug the £22bn “black hole” identified in the public finances. However, it could discourage people from saving towards retirement and exacerbate ‘pensioner poverty’ in the longer term.
#3 The Tax-Free Lump Sum
Currently, each UK taxpayer can access up to 25% of their pension savings without income tax after reaching their Normal Minimum Pension Age (i.e. 55). In technical language, this is called a pension commencement lump sum (PCLS).
The tax-free lump sum can be taken in one go by withdrawing the whole amount. Alternatively, a person can make regular withdrawals with the rest of the funds remaining invested. This could allow for a larger tax-free amount to be taken in the future if the pension pot grows in value.
Labour is very unlikely to get rid of the tax-free lump sum, given its popularity. However, there has been a lot of press speculation around the possibility that the Chancellor could reduce it to a lower fixed limit. Under current rules. the value of tax-free lump sums a person can receive from their pension is limited to £268,275. There would almost certainly be a big pushback against any lowering of this limit, since many savers have planned their finances on this benefit.
#4 The “Lifetime Allowance”
The Lifetime Allowance (LTA) has now changed in 2024-25. In previous tax years, the LTA represented the maximum tax-free amount that an individual could have saved across all of their pensions – i.e. £1,073,100.
However, this threshold had been frozen since 2020. Yet, prices (inflation) were continuing to rise, which meant that an individual who had reached the LTA saw their retirement savings decline in real terms over time.
Also, workers in specific sectors – e.g. senior doctors in the NHS – were seeing their pension pots breaking tax-free thresholds as their earnings went up. To avoid a mass exodus in the NHS, the previous Conservative government removed the LTA framework in April 2024. A complicated system of new allowances took its place.
When these changes were announced, Labour claimed it would re-introduce the LTA if it won the next general election. However, in June 2024 (when the election campaign was underway), this pledge was dropped after lobbying from senior doctors.
Pension planning in an uncertain world
There have been many reports of pension savers “panicking” as the 30th October Budget approaches. Sadly, it rarely ends well when people make knee-jerk reactions to alarmist media reports. Rather than making impulsive decisions based on what “might happen”, speak with a trusted financial adviser to explore your concerns and options.
One of the benefits of a robust retirement plan is that it gives you manoeuvrability in different policy scenarios. For instance, by having assets in different “locations” – e.g. pensions, ISAs and general savings – you can mitigate some of the risks associated with each one, such as a future government changing certain rules.
Remember, the above-mentioned pension allowances are very popular. Any changes would likely draw a lot of government criticism and would be complicated to implement. As such, reforms (if they arrive) may not be implemented immediately – giving clients more time to consider their best options.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.