Chancellor Jeremy Hunt has made significant changes to pensions in the Budget, and high earners are the biggest beneficiaries.
But how will those changes affect you? And are the additional financial incentives on offer to those on large salaries a sufficient reason to carry on working, or perhaps come out of retirement?
ROBIN POWELL has been discussing the details of the Budget, and what they mean, with rockwealth Leamington’s CHRIS WALLSGROVE.
RP: The big news in the Budget is that the £40,000 cap on tax-free annual pension contributions is rising to £60,000. The Government clearly wants to discourage high earners, and doctors in particular, from taking early retirement. How much of an incentive is this in practice?
CW: High earners have done very well out of the Budget. In terms of the public sector and, in particular, the NHS, I think the increase in the annual allowance is a massively positive move. The BMA has come out and said they think this will help close the floodgates of doctors leaving early.
The £40,000 annual allowance made things really complicated for doctors. It was very hard, because their pension scheme is so inflexible, to control what they were putting into their pension in any given year. So if they got a promotion, if they took on additional work or responsibility, they could quite easily exceed the annual allowance without knowing they were going to in advance. There’s already a lot of pressure on doctors, and this was just adding another layer of hassle and complexity. Increasing the allowance to £60,000 will certainly help. It means they can focus on their work rather than worry about receiving an unexpected tax bill.
So yes, for doctors and for other senior NHS professionals, I think it’s hugely helpful and will help to keep them in work. It’ll do the same with senior police officers, head teachers and people in other senior roles in the public sector. My fear is that, in the private sector, it will have the opposite effect.
What do you mean by that?
Well, people in the private sector who are able to save £40-to-£60,000 pounds a year into their pensions are often business owners who sacrificed a lot in the early years of their career in terms of potential earnings and their ability to save for the future. That’s when they were growing their businesses and investing any spare money in those businesses. Increasing the annual allowance for those people allows them to save more and plot that exit a bit sooner, which makes them more likely to leave the workforce, in other words, the opposite of what the Government intends.
Another big headline from the Budget is that the £1.073 million tax-free lifetime allowance (LTA) on pension pots is being scrapped. This too is very good news for high earners, isn’t it, and will surely help to keep them in the workforce?
I think so, yes, certainly in the public sector. The abolition of the LTA will help to remove that sense of being penalised for taking on additional work, or staying in work beyond your mid-50s.
Again, though, for the same reasons I mentioned regarding the annual allowance, I'm just not so sure about the private sector. Removing the allowance may even speed up retirement for some.
But looking at it purely from the point of view of high earners, yes, this is another very positive development which effectively makes high earners even better off.
The Budget also included a rise in the money purchase annual allowance (MPAA) from £4,000 to £10,000. Who will this benefit and how significant is it?
This is another big positive and something for which people have been lobbying for a long time, particularly the various pension providers.
The people this will really help are not the people we've been talking about in relation to the annual allowance and LTA changes. It will typically be lower earners who benefit for this one, or perhaps people who were forced to access their pensions early to help with difficult circumstances, perhaps redundancy or health issues, but are now back on their feet and ready to return to work.
Bumping up the MPAA to £10,000 just gives those people the opportunity to rebuild their pension provision. So yes, again, it’s a hugely positive change.
Without wishing to make any political comment, this Budget does seem to have benefited the very wealthiest. Are you disappointed that nothing was done to encourage people generally to invest more in their pensions?
That’s right, this Budget substantially benefits the wealthiest in society. I can understand the rationale for doing what the Government has done, and I think the changes will bring about some of the intended consequences, particularly in terms of retention of people in the workforce.
Of course, the changes on childcare benefit a much wider cross-section of the population, not just the wealthiest, and I think those are very welcome.
Personally I would have liked to have seen an extension of auto enrolment into pensions. Auto enrolment is one of the few pension policies that you can say has been a real success. I remember when it was introduced and there was talk of opt-out rates of 30-40%. But that hasn’t happened. Schemes have improved and charges have come down massively. So people are in a better position than they have been for a long time in terms of pension saving. All of the businesses we work with have extremely low opt-out rates.
I would love to see auto enrolment extended to everyone aged 18 and over, rather than 22, as well as to people in part time-employment as well as full-time employees. And I think the cost implications would be relatively modest for most businesses.
I’m guessing you’ve been very busy since the Budget. Is that right?
Yes, we’ve been very busy! Clients started calling us soon after the Chancellor’s speech. We have a large number of clients who are really impacted by these changes. We’ve been modelling and planning their futures based around one set of legislation, and now that has completely changed.
A lot of the planning we’ve done historically has been around keeping people within the lifetime allowance, and now that’s been ripped up. Some of our clients are going to be several hundred thousand pounds better off as a consequence of this.
As we’ve discussed, the Budget raises questions about when people should retire or indeed whether they should return to work. How can a financial planner help in a situation like this, when you’re undecided about what to do?
This is just a reminder of the value of taking the opportunity to assess how you want to be living your life. We only live once, and we owe it to ourselves and our families to get the most out of the time we have.
Everybody's different, and we all need to ask ourselves, What do I really want to do with my time? How do I get value from it? How do I feel like I'm adding value to society? What do I enjoy doing most?
The changes announced in the Budget give people more flexibility to achieve what they want to do. Having a financial planner to help you understand what options you have, and to help you enjoy life without having to worry about whether you have enough money, is crucially important. I can see us being very busy in the weeks and months ahead.
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