Alice Guy explains what state and private pension changes and trends to expect next year.
As we look forward to the new year, it’s time for Santa to take a well-earned rest and the reindeers to roam free once more.
For pension savers, the post-Christmas lull can be a great opportunity to put your feet up and do some financial planning for the year ahead.
Here, we review what state pension and private pension changes to expect in 2023, and how they might affect your retirement plans.
1) State pension triple lock
In April 2023, the state pension is due to rise in line with inflation by 10.1%, as the much-debated triple lock is reinstated. This means pensioners on the new state pension will receive an income boost of £963 with the state pension rising to £10,600 per year.
The rules for older pensioners, who retired before 2016, are slightly different. They will see the basic state pension rise by 10.1% to £8,121, plus an increase in any additional state pension payments.
The state pension increase was an expensive splurge in an otherwise austere Autumn Statement and will cost the Treasury an estimated £11 billion per year.
2) State pension age
During 2023, the government is widely expected to accelerate changes to the state pension age: a move that could save the Treasury an estimated £5 billion.
The government's final decision will be based on the pensions review, due to report in May 2023. The last review in 2017 suggested speeding up the changes and increasing the state pension age from 2037 to 2039.
If changes go ahead, today’s 50 to 51-year-olds could have to wait until they turn 68 to get their state pension. But, as ever, the devil is in the detail.
Expected changes will leave many of us with a hole to plug in our pension income if we still plan to retire before the state pension age. We will potentially need a bigger pension pot, as we’ll need to bridge the gap for a few years until the state pension kicks in.
3) The Great British early retirement
Perhaps surprisingly, there’s also been an increasing trend towards early retirement since the Covid pandemic.
This trend, combined with the rising state pension age, means there is a large group of older Britons who are retired, but are not yet receiving the state pension. According to the Office for National Statistics, “in May to July 2022 there were 386,096 more economically inactive adults aged 50 to 64 years than in the pre-coronavirus pandemic period”.
And a recent House of Lords report concluded that most early retirees were unlikely to return to work.
It’s a reminder of the importance of taking charge and planning for our own retirement, especially if we’re planning to retire before state pension age.
4) Cost of contributions crisis
The cost-of-living crisis has made it more difficult for many of us to invest during 2022, and this trend is likely to continue into 2023.
A report by the Pensions and Lifetime Savings Association (PLSA) revealed that one in five pensioner savers have considering reducing or stopping their pension contributions.
The survey also showed that 45% of pension schemes expect to see more savers reduce pension contributions in the next six months.
If you do need to adjust or pause your pension contributions, it’s important to have a plan to restart your contributions in the future if your circumstances change. Even small contributions can mount up over time, so it’s worth dropping rather than stopping contributions if you can afford to do so.
5) Annuity versus drawdown
One glimmer of hope for pensioners is the long overdue improvement of annuity rates during 2022. Annuity rates rose 40% this year, meaning that they are beginning to look attractive for some pension savers.
But although some annuity rates may look tempting, it’s important to remember that a level annuity won’t rise with inflation and, depending on your contract, you won’t be able to pass on any income to your relatives.
Of course, it’s not an all-or-nothing decision and you can choose a mix of income drawdown and annuity income.
If you are thinking about buying an annuity, then it’s important to get advice from an independent financial adviser. They will be able to take your financial situation and circumstances into account and help you make the right decision.
6) Gilts and bonds crisis
In the past, bonds usually moved in the opposite direction to stock prices when markets were volatile, therefore insulating investors from stock market volatility. But during 2022, stocks and bonds moved in lockstep, as rising interest rates encouraged investors to sell older bonds in favour of newer bonds with higher rates.
The jury is still out on what will happen to bond prices during 2023, but some experts believe that reduced prices could offer good value: lower prices mean higher yields and potentially higher income in the future.
7) Increasing tax burden
With the government on the hunt for extra cash, many tax thresholds are due to be frozen or reduced during 2023. This means we will be pay more to the taxman in the future, as our pay rises but the thresholds remain the same until 2028.
By 2028, someone currently earning £30,000 will pay an extra £1,919 in tax, due to their pay rising but the tax thresholds remaining the same. By 2028, they will be paying 21% of their total earnings to the taxman, compared with 19% this tax year.
Likewise, by 2028 someone currently earning £50,000 will pay an extra £4,280 in tax and 27% of their total earnings to the taxman, compared with 24% this tax year, as more and more of their earnings are taxed at the higher rate.
Of course, the increasing tax burden makes pension saving potentially even more attractive in the future. Pension tax relief is one of the best ways to reduce your tax burden as pension contributions are topped up by the taxman, so are effectively tax free.
8) Squeezing pension allowances
Unfortunately for pension savers, pension allowances have also been frozen for many years and may even become a target for reductions during 2023.
The pension annual allowance, which caps the amount you can pay into your pension each year, has been reduced over the years, from £255,000 to £50,000 in 2012 and then again to £40,000 in 2014, where it stayed. The money purchase allowance was reduced from £10,000 to £4,000 in 2017.
The lifetime allowance, which limits the total amount you can save into your pension, was £1.8 million in 2012 and has been hovering around £1 million since 2017: it’s halved in real terms since its introduction in 2007.
Watch out in 2023 in case the government decide to further target pension allowances so they can save on pension tax relief.
9) Pension dashboards
One good piece of news for pension savers is that pension dashboards’ legislation is finally expected to come into effect this year.
The new pension dashboards will give pension savers a summary of all the pensions they hold with different providers in one place when they log into their pension scheme.
They should make it easier for investors to keep track of their wealth and know if they are on target for a comfortable retirement.
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