Chancellor could use Budget pension overhaul to keep 50-somethings in work longer

Pension changes in the Budget are expected to be aimed at keeping people over 50 working longer.

Rumors leading up to March 15 suggest Chancellor Jeremy Hunt could take a ‘carrot and stick’ approach to ease labor shortages, which politicians fear will hamper economic growth.

The causes of many older workers leaving their jobs are hotly debated, such as pandemic-related ill health, high childcare costs forcing grandparents to help out, and age discrimination in the workplace.

But on pensions, Hunt is reportedly considering easing tax restrictions pushing the wealthy into early retirement, while at the same time bringing forward an increase in the state pension age that would make it harder for the lower-paid to afford to retire. working with. Below we round up possible changes.

Lifetime and annual allowances can be relaxed

The chancellor is reportedly considering a review of lifetime and annual benefits as higher-paid professionals, particularly much-needed veteran doctors, opt for early retirement rather than face tax penalties for exceeding it.

It is said that both fees will be increased or relaxed in one way or another in the budget.

How do the surcharges work now? The annual fee of £40,000 is the standard amount you can put into your pension each year and qualify for tax relief. It includes your own and your employer’s contributions and the tax credit itself.

The rules are more complicated for higher earners, of whom annual allowance is ‘tapered’ downwards up to £10,000 or £4,000.

The threshold income level, where people’s annual income starts to be calculated for the purposes of pension tax relief, is £200,000.

But the annual allowance is starting to taper off for those with adjusted income levels – including pension contributions – from £240,000.

For those with an adjusted income of £300,000 or more, the phasing out reduces the annual allowance to just £4,000.

The Lifetime Allowance or LTA is the amount you can save for a retirement and get tax relief in total, and currently stands at £1,073,100.

Jason Hollands, managing director at Evelyn Partners, says: ‘In the case of the LTA, investment growth is included, so that someone who has made wise investment decisions can be penalized with a tax levy that many would consider unfair.

“This has led to a disincentive to continue retirement savings among higher-earning professionals and is a factor driving early retirement decisions at a time when the economy is facing the challenge of a tightening labor market.

“If we have to have an LTA at all, it’s certainly far too low, given that it was £1.8 million just 10 years ago and since inflation has driven incomes and savings soaring.”

Cash purchase annual allowance: Rule stops ‘pension recycling’ for tax benefit

The financial industry has launched a concerted campaign to persuade the chancellor to relax the little-known ‘MPAA’ rule.

This is designed to deter people from recycling their retirement withdrawals back into their pot to take double advantage of tax relief.

But it’s also a barrier to saving for retirement for people who want to get back to work and increase their pensions at the same time, according to a letter to the Treasury from 17 financial firms and industry groups.

A move on the MPAA seems less likely after an unpromising response from the Treasury, which said, “The MPAA affects about 25 percent of occupational premium savers age 55 and older.

“The ceiling is intended to prevent pensioners – who have already taken (part of) their pension – from receiving double tax relief by financing continuous savings with their existing pension pot, which has often been built up tax-free.”

How does it work now? The rule prevents anyone who has made a withdrawal, on top of their 25 per cent tax-free lump sum, from benefiting from valuable tax relief on contributions worth more than £4,000 a year.

The MPAA’s current annual savings limit of £4,000 has been in place since 2017, when it was reduced from £10,000.

“There are good reasons to rethink the rule,” said Dean Butler, general manager at Standard Life.

“A combination of the pandemic followed by a crisis in the cost of living means that many people will be plunged into retirement for the short term.

“We think an increase in the limit could help, but its benefit will be limited to people on relatively high incomes and bigger questions have been raised about whether it’s really health problems, or the relatively good financial position of some people living outside the elderly.” door holds. the workforce.’

State pension age: Rumors about an earlier increase in the state pension age to 68 years

The Chancellor has reportedly been eyeing an accelerated increase in the state pension age to 68 by 2035, which would force many people aged 43 to 54 to work longer.

The government has been thinking for years about the timing of this change, but it has to make some kind of announcement soon, so it could very well be in the upcoming budget.

What are the plans so far? The state pension age for men and women is now 66 and will be raised to 67 between 2026 and 2028.

Officially, the increase to 68 is scheduled between 2044 and 2046, but a previous government review recommended bringing the change forward to 2037-2039.

It then decided to take another look, and it is the outcome of this latest assessment that should now be expected.

“Due to affordability considerations, the government can argue that the state pension age should be raised to 68 years earlier than currently planned, possibly in 10 to 12 years,” said Steven Cameron, director of pensions at Aegon.

“Raising even earlier would simply not give people enough time to plan ahead.”

‘The higher the state pension age, the more difficult it becomes for some people to stay in work until then.

An increase in the state pension age to 68 could also prompt the cabinet to raise the earliest age at which [private] pensions are accessible up to the age of 58. It is usually set 10 years earlier than the state pension age and will rise from 55 to 57 years in 2028, which creates enormous complexity.’