There have been lots of changes made to pensions in the UK in recent months. Rachel Lacey explains those which will have the biggest impact on all of us.
This year’s Budget brought a raft of good news for wealthier retirement savers, but those aren’t the only pension changes in the pipeline.
From state pension increases to the abolition of the lifetime allowance, get the lowdown on the key pension changes you need to be aware of this year.
1) Bumper state pension rise in store
From 6 April this year the full new state pension will rise from £185.15 to £203.85 a week. The bumper 10.1% increase is thanks to the ‘triple lock’ – a government commitment to increase state pension payments by the greater of earnings growth, inflation or 2.5%.
Soaring inflation in 2022 means that pensioners are getting the highest-ever annual increase to the state pension.
The triple lock also protects the basic state pension, so payments for people who retired before April 2016 will also go up by 10.1% (from £141.85 a week to £156.20).
The additional state pension, also known as the State Earnings-Related Pension Scheme (SERPS), isn’t protected by the triple lock, but as it’s linked to inflation it will also go up by the same amount.
2) More time to top up National Insurance contributions
To qualify for the full new state pension you now need 35 years of National Insurance contributions. These can be paid for through earnings, or you might qualify for National Insurance credits if you are claiming certain benefits such as Universal Credit or child benefit. If you’ve got less than 35 years’ (but more than 10) you’ll get a proportional amount.
If you have gaps in your National Insurance record and are looking like you might not be on track to get the full state pension, it is possible to buy voluntary contributions.
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Normally you can only buy contributions for the last six years, but there is currently an ‘offer’ that allows you to go back a further 10 years (so back to the 2016-17 tax year). The deadline was initially 5 April, but following significant demand in recent months, the offer has since been extended to the 31 July this year.
If you are in reasonably good health, voluntary NI contributions can be a lucrative investment.
A year’s worth of NI currently costs £824.20 and would boost your eventual pension by £275 a year, while you could plug a 10-year gap with an investment of £8,242 and see your annual income go up by £2,750. That means it only takes around three years to recoup the cost of your investment.
3) Changes to the state pension age
Speculation is mounting as to whether there will be an upcoming announcement about state pension age increases.
The state pension age last rose from 65 to 66 in 2018 and is set to rise again to 67 in 2028 and to 68 in 2046.
It had long been proposed that this last increase should be brought forward to between 2037 and 2039. There have even been some calls to accelerate it even faster. However, recent reports are now claiming that falling life expectancy means it may not be necessary to accelerate state pension age increases.
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The Pensions Act 2014 requires the government to review the state pension age on a regular basis and it’s next report must be published by 7 May this year.
4) The abolition of the lifetime allowance
The biggest bunny the chancellor pulled out of his hat on Budget day, was the removal of the lifetime allowance (LTA).
From 6 April this year, charges for breaching the allowance will be scrapped, before the LTA is officially abolished in the 2024-25 tax year in a forthcoming Finance Bill.
This will mean people can save as much as they like in pensions and still get tax relief on contributions. In the current tax year, the amount individuals could save into pensions was capped at £1,073,100.
Although the lifetime allowance was originally only intended to affect the wealthiest of investors, the failure to increase it with inflation had meant that more people were being caught out.
Most notably this included senior public sector workers – such as doctors and headteachers – because of the way the value of defined benefit pensions is calculated. Many more moderate savers, who had paid into pensions regularly through their working lives and had enjoyed good investment performance, were also increasingly getting caught out by the cap.
5) A new cap on tax-free cash
Although many savers were thrilled by the removal of the lifetime allowance, they were less enamoured by a new cap on tax-free cash.
From 6 April the amount of tax-free cash you can take out of a pension as a lump sum will be capped at £268,275 unless you have lifetime allowance protection.
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That means that while there are no limits on the eventual value of your pension, you won’t be able to get any more than £268,275 as a tax-free lump sum, unless you hold a lifetime allowance protection.
6) Increases to pensions annual allowances too
In addition to removing the lifetime allowance, the chancellor is also making it easier to pay more into your pension each year, by increasing three key allowances from 6 April this year.
- The Annual Allowance: the maximum amount you can pay into your pension will rise from £40,000 a year to £60,000. Although it’s important to note that you cannot pay in more than 100% of your income in any one year. That means if your income for the year is £50,000, the maximum you can pay in is also £50,000 – you can only pay in £60,000 if your annual earnings match or exceed that figure.
- The Money Purchase Annual Allowance: this is the amount you can pay into your pension each year, once you have made a taxable withdrawal from it. This is lower than the annual allowance (to prevent the recycling of pension contributions to get double the tax relief) but will rise from £4,000 a year to £10,000 in April - subject to having earnings up to this level.
- Tapered Annual Allowance: once you earn above a certain threshold, the amount you can pay into pensions is also gradually reduced. However, from April, the maximum amount the allowance will drop to will rise from £4,000 to £10,000 a year. The adjusted income limit – the point at which the Tapered Annual Allowance is triggered – will rise from £240,000 a year to £260,000.
7) Pensions dashboard delayed – again
One change you might have been expecting this year – the introduction of the long-awaited Pensions Dashboard Programme – has been pushed back into the long grass once again.
The idea behind the pensions dashboard is that it would allow everyone to view all their pensions savings online, in one place, including their entitlement to the state pension.
This would make it easier for individuals to keep track of multiple pension schemes and work out if they have saved enough for retirement.
However, in March this year, the Department of Work and Pensions confirmed that it had ‘re-set’ the timetable without providing any further information around a target launch date.
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