Will Budget pension lifetime and annual allowance changes help you?

Chancellor Jeremy Hunt went further than expected today with major changes to retirement savings in his budget.

The biggest move came when Hunt abolished the restrictive lifetime pension benefit entirely, rather than raising it from just under £1.1m to £1.8m as expected.

He also increased the annual fee for contributions that can be made from £40,000 to £60,000.

The measures will most likely help high earners who have already built up a substantial pension – and are designed to keep over-50s, such as doctors, in work.

But what difference do the lifelong and annual stipend shakeups make and will they ever help you? We explain which pension changes the Chancellor has made and what this all means for you.

What are the Budget pension changes in a nutshell?

Chancellor Jeremy Hunt gave high-earning workers a boost by removing the limits on how much can be saved into a pension, known as the lifetime pension benefit.

He also increased how much employees can save each year for retirement and still receive tax credits, known as the annual allowance.

What is the lifelong pension benefit?

This limits the amount people can have in their retirement pot without tax penalties, but the amount includes both the money they and their employer have deposited and any growth over the years.

There is no limit to how much can be paid into a pension as savers can continue to pay above that, but when they retire they will face a hefty tax burden.

Any money above this level that is considered income is charged an additional 25 percent and a lump sum charge of 55 percent – this is in addition to the normal income tax.

The lifetime stipend was expected to be increased to £1.8 million in the budget, but has now been scrapped altogether.

Why is the lifelong benefit so controversial?

When the lifetime allowance was introduced by Labor in 2006 it was £1.5 million, this was gradually increased to £1.8 million in the 2010/2011 tax year.

However, it was subsequently cut by Conservative Chancellors George Osborne and Philip Hammond, taking it all the way down to £1m in 2017/2018.

If the lifetime benefit had risen in line with inflation since 2006, it would now be £2.66 million, according to This is Money’s inflation calculator.

For someone with a defined contribution pension that is invested and withdrawn at a standard rate of 4 per cent per annum, the lifetime allowance of £1,073,100 equates to an income of £43,000.

Why scrap the pension benefit for lifelong?

Increasing pressure on a lifetime benefit that has failed to keep pace with inflation, wages and growing pension pots has had unintended consequences.

Higher-paid professionals, especially much-needed veteran doctors, are opting for early retirement rather than facing tax penalties for exceeding it.

The government wants to keep people in work and has thrown them a pension sweetener to encourage them.

Due to the changes, there is no limit to how a pension pot can grow without tax penalties.

What do changes to the annual allowance mean?

The annual allowance is the standard amount that can be contributed annually for pensions and is eligible for tax relief.

However, it’s not just the money you pay. It includes your contributions, your employer contributions and tax relief.

The base rate tax credit of 25 per cent is automatically added to pension contributions, so without an employer paying a pension, someone could put in £32,000 before reaching the current limit of £40,000.

The Chancellor has unveiled plans to increase the annual stipend to £60,000.

The rules are more complicated for higher earners, whose annual allowance is ‘tapered’ to £10,000 or £4,000. It is not clear whether this system will be scrapped or relaxed.

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.

Will the state pension age change?

Rumors circulated ahead of the budget that the Chancellor would announce plans to raise the state pension age to 68 in 2035.

However, this has not happened yet.

Nor did he raise the age at which Britons could access their private pensions to 60, as suggested in several reports. This is now 55 and will rise to 57.