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14 Mar 2020

  • What the budget means for your pension

What the 2020 budget means for your pension

New pensioners will be £343.20 better off by the end of next tax year

The pension triple lock meant state pensioners will see an increase of 3.9% in 2020. The triple lock was introduced in 2012 and guarantees the state pension will increase by either inflation, average earnings or 2.5% — whichever is greatest.

For those that qualified for it before 6 April 2016 (also known as the new state pension), this equates to an increase of £6.60, taking home £175.20 a week. Those that started taking the state pension before this date will see their weekly pension increase to £134.25.

Increase of taper annual allowance – aimed at NHS high earners

The tapered annual allowance, controversially introduced in 2016, aims to limit the amount of tax relief that can be received by high earners. It’s a complicated system that requires higher earners to calculate income in addition to their salary.

There are two types of income to assess: threshold and adjustable income. In general, threshold income is gross income minus personal pension contributions that exceed £110k a year. Adjusted income is gross income plus employer pension contributions that exceed £150k a year. Any income above these amounts reduces the annual allowance.

Currently the annual pension contribution limit is set to £40,000 a year but falls for those with threshold or adjustable incomes. For every £2 of adjusted income earned above £110k (assuming £40k employer pension contributions) the pension allowance falls by £1. This can see higher earners’ annual pension allowance fall from £40k to £10k (the lowest the taper can go).

Going over the annual pension contribution limit (tapered or otherwise) carries a hefty tax charge, but the calculation can be very complicated, especially when DB pensions and carry forward are part of the calculation. This resulted in high earners in the NHS (typically consultants) refusing to take additional shifts as they’d be penalised financially. It meant that working actually cost them money rather than earning them money.

The government announced in the budget that the threshold will now increase to £200k. The Chancellor says this will mean 98% of NHS consultants will not be subject to the taper, allowing them to work additional hours and help with the ongoing Coronavirus crisis gripping the nation.

While the change is welcome, many feel it’s a missed opportunity to get rid of the taper all together. High earners typically have several types of income so, as they near the threshold income level,  it becomes fiendishly complicated to work out whether taking additional work is going to land them with a large tax bill. The pension system needs simplification and this is kicking the can down the road. Financial advice is essential.

Lifetime Allowance (LTA) increased in line with CPI (though this happens every year)

The amount you can save during your lifetime in your pension has been increased in line with inflation to £1,073,100. This won’t be news to some — this has been the formula since 2017.

OBR surprised by pension freedoms behaviour and tax revenues (not a change but a finding)

Last but not least, the Office for Budget Responsibility has published analysis of pension withdrawals since pension freedoms were introduced in 2015. It had expected those that were first to exercise their freedoms would withdraw more at the beginning and then scale back. Instead it as found they have continued to withdraw at a similar and steady rate, which has increased tax revenues by two thirds more than expected.

Make the most of our calculators to find the best home for your pension. DIY investment platforms can be found here while robo-advisers can be found here.


About the Author:

Rich joined Fundscape after 11 years at Old Mutual Wealth/Quilter in Southampton, where most recently he provided platform analysis and market insight to inform its distribution and platform strategy. Rich’s career at Old Mutual Wealth (then Skandia) began in its contact areas, before moving into the training department where he wrote and implemented a training accreditation scheme for his colleagues. He then moved to managing the delivery of new platform enhancements in the businesses before finally moving to its UK platform marketing team where he provided insight into platform propositions and, using data from Fundscape, measured Old Mutual’s place in the platform market.

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