Golden oldies: four key takeaways from Budget pension announcements

Katie Binns assesses what the two pension changes revealed in the Budget could mean for pension savers, and highlights some key steps to take.

Alongside news about cheaper Prosecco, October’s Budget announced a new tax relief for low earners in net pay schemes that will help a million workers – and a consultation on the charge cap that may result in most workplace pensions becoming more expensive. 

What do these announcements mean, and what do we need to think about when considering our pension schemes?

First, the good news. Workers who earn less than the personal income tax threshold (£12,570 for 2021-22) and don’t receive tax relief when making pension contributions to net pay schemes, will no longer miss out on the 20% government boost afforded to others. These workers will be eligible to claim a top-up.

This means up to 1.2 million individuals – 75% of whom are women, often part-time working mothers – could benefit by an average of £53 a year. The new system will correct a longstanding inequality between those on low incomes in “relief at source” pensions (where contributions are made as though basic rate tax had been deducted) versus “net pay” schemes (where contributions are deducted from pay before any tax is applied).

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However, while this top-up is welcome news, the system will not be introduced for another three years (2024-25 onwards), meaning claims cannot be made until 2025-26 at the earliest.

It also seems that workers will need to actively claim the top-up in order to receive their tax relief. Putting the onus on workers means there is a real risk of non take-up. We already know more than half of all additional - or top-rate taxpayers - those earning more than £150,000 - do not claim pension tax relief they are due. It’s easy to imagine the same could happen here too.

The second pension announcement in the Budget relates to the 0.75% cap on the fees that defined contribution schemes can charge savers. This limit benefits the 90%-plus of workplace pension investors whose money is in the default funds of defined contribution pensions (which make up the majority of workplace pensions).

The government will consult “within the next month” on whether to increase the cap so that pension schemes can invest in a broader range of assets and more innovative businesses. That’s important at a time when people are looking towards a sustainable future and want to invest in green companies.

Becky O’Connor, head of pensions and savings at interactive investor, says the chancellor is after the nation’s life savings to fund UK infrastructure. “Rather than simply increasing taxes to pay for it, the government is considering enabling pension fund managers to divert the savings of millions of people to ‘innovative’ development, claiming this requires more expensive investment strategies than is possible under the current charge cap of 0.75%.”

She believes it is possibly an unnecessary measure. “The typical workplace pension scheme fees are much lower than the cap, at around 0.4% to 0.5%, begging the question of whether the cap really needs to be relaxed to fund these goals.”

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While higher returns for pension savers and an infrastructure boost for the UK is the ultimate goal here, it may just be pie in the sky. “There’s always the risk that higher returns won’t materialise – and people end up paying more for their pensions for no good reason,” says O’Connor. “Pension savers will want visibility over what is happening under the bonnet if charges do rise. Otherwise this could look like playing fast and loose with other people’s retirement money.”

What should you take away from these announcements? Here are some old but golden rules.

• Make sure you claim any pension tax relief you are owed. You can do this in two ways: through your self-assessment online or by contacting HMRC directly. You will need to state the exact amount of your pension contributions. Your relief will be supplied either as a rebate, a reduction in your tax liability or a change to your tax code. 
• Scrutinise your pension costs. Between the annual management charge, underlying fund fee, platform fee, possibly a service fee and an inactivity fee (for old workplace pensions left to while away), your overall charges may be significantly eating into your returns. There is no easy comparison on pension costs, but experts generally agree that annual charges of more than 1% are expensive. And nearly half of UK savers (49%) have annual pension charges of over 1%, according to Profile Pensions.
• Investing in a green way via your pension is already possible. Most workplace pensions should offer an “ethical” option which you can easily switch to. If not, speak to the pension provider and find out what funds they offer.
• If you’re a member of a defined benefit pension, contact the pension trustees to find out where the funds are invested. For those with old workplace pensions, look at what options are available within these plans and consider transferring and consolidating them, so you have more control over how they are invested.  

ii explains more on green investing via your pension, how to pick investments and encourage your pension provider to move to net zero.

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