Spring Statement: what to look for (and what not to look for) on pensions

Before Wednesday's Spring Statement, Becky O’Connor, head of pensions and savings at interactive investor, comments on what the Chancellor might pull out of the bag (or not), for pension savers and retirees.

State pension: commitment to restore the triple lock as planned and increase temporary support for pensioners in the meantime

The Chancellor needs to find a way to reassure millions of pensioners who can’t afford to live right now. Almost half of people over state pension age are dependent on the state pension for their retirement income. According to interactive investor estimates, pensioners could be up to £1,000 in the red over the 12 months from April as the cost of essentials rises by far more than the state pension.

Pensioners can’t go out and ‘side hustle’ their way out of a cost of living crisis. Without help, they might end up in debt, which is very hard to get out of when you have no income and your costs exceed your pension.

The Chancellor needs to commit to reinstating the triple lock on time as promised and to offering emergency support to prevent poverty among older people before the triple lock is reinstated.

Pension tax relief: should be spared as protection against inflation

Pension tax relief is routinely flagged as a potential target for the Chancellor with any Budget or Spring Statement announcement. There hasn’t been so much concern this time that it might be for the chop, so it would be a big surprise if he moved to slice relief for higher earners.

In a high inflation environment, pension tax relief offers a key way to overcome the impact of inflation on long term savings. It’s the secret weapon of long term savers and investors, whether they are basic or higher rate taxpayers. So cutting it now would be very detrimental to the nation’s future financial wellbeing in retirement and ultimately could make even more people dependent on the state pension in years’ to come.

While it’s hard to know how much of a disincentive to save into a pension cutting tax relief would be, as awareness of how it works is questionable, for higher rate taxpayers who are prioritising pension savings later in working life as they approach retirement, it is more likely to be a big incentive over other types of saving or investment vehicles. They are already being disincentivised by the lifetime allowance. Any other disincentives would make planning a good retirement much harder.

For a basic rate taxpayer, a £100 contribution requires a personal contribution from you of £80, with £20 from tax relief – that’s like getting an extra 25% ‘return’ on your initial contribution from the government straight away. If you are a higher rate taxpayer, the effect is even greater – a £100 contribution requires £60 from you with the remaining £40 coming from tax relief – that’s a 67% ‘return’ on your initial contribution immediately.

For someone earning £55,000 – an 8% pension contribution over one year is £4,488. But the personal contribution they make is just £1,683. With tax relief added, it’s £2,805 – they get £1,122 added in tax relief. As a % of the personal contribution, this £1,122 tax relief is 67% - a huge instant boost for those trying to make their money beat inflation.

You might need to lock up your money until you are 55 (or 57 from 2028) in return for this amazing benefit – but if you don’t need it sooner, that price is well worth paying.

In the current market, you’d be hard pressed to find another investment that offers such an uplift for nothing. It’s free money. If you happen to also invest in something that generates decent growth within your pension – so much the better. That free money is being spun into more money, adding even more value to your funds.

Lifetime Allowance threshold

Having frozen the threshold at £1,073,100 until 2026 in the last Budget, it’s highly unlikely the Chancellor would move to relax this limit.

However as stock markets are volatile and some uncrystallised pension pot values have fallen since they were ‘tested’ against the Lifetime Allowance for a tax charge, it would be worth the Chancellor considering concessions that allow a re-test at a later date after age 75 – the age at which the value of benefits taken are tested a second time, or else many could run the risk of being taxed on investment growth that they do not in the end benefit from.