Pension Tension

How Your Pension Might Be Affected By Changes In Policy After The Election

The Department for Work and Pensions and Treasury spend around £124 billion per year on state pension payments and more than £50 billion for tax relief on pension contributions, so it is no surprise that current and future governments may want to make changes.

The Triple Lock

The state pension is increased each year based on the controversial triple lock calculation, which increases the weekly payments each year by the highest of inflation, wage growth, or 2.5%.

The state pension rose by 8.5% in April, in line with wage growth.

It is an expensive policy, especially as the triple lock increases are far higher than the rate of inflation and critics warn that it creates a generational divide with those still working who do not benefit from increases of the same level.

Some groups, such as the Institute for Fiscal Studies, have even called for it to be scrapped.

You can't help feel that many politicians wish they had not got themselves into this issue, as no one wants to be the person to abolish it but everyone realises it is very expensive and raises questions around why pensioner's should receive beneficial treatment.

The Liberal Democrats party leader said it was his party that came up with the plan during the coalition years - and whatever happens at the next election, their support for the policy will remain.

The Conservatives have talked about the possibility of a Triple Lock Plus - which means that you would get a higher tax allowance for pensioners - so they are not taxed aqs much on pensions.

Labour have said they will keep it.

It's likely to always be under review - although no immediate sign that it will be abolished.

Life Time Allowance

Up until recently, you could save as much as you wanted into a pension, but if the value of your pension pot went over what was called the Lifetime Allowance (£1.073million), you could be hit with a tax tax bill.

It was a one-off charge of 25% if paid as pension or 55% if paid as a lump sum on the surplus.

Interestingly and perhaps suprisingly, this affected defined benefit schemes as well as defined contribytion schemes, even though with DB schemes, there is often no actual value of a pot. The value of the pension pot was assumed.

Although this is a big penalty to pay, you should remember that the money going into your pension got what is effectively a huge tax rebate - up to 40% for higher tax payers. So the penalty is not as bad as it looks, although there is no doubting the pain it would cause to anyone having to pay it. Although, you would pay income tax on the way out and you would have probably had employer contributiuons added to your pension - so you might still be better off, even with the tax charge.

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• Basic-rate taxpayers get 20% pension tax relief

• Higher-rate taxpayers can claim 40% pension tax relief

• Additional-rate taxpayers can claim 45% pension tax relief
  

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But in the 2023 budget, the Chancellor, Jeremy Hunt, announced that the lifetime allowance had been abolished. This was done in part to counter complaints that senior doctors and nurses were leaving the NHS early to avoid hitting the limit and being charged extra tax. The lifetime allowance limit was removed from April 2024.

When the LTA was removed they introduced a new lump sum allowance of 25% of your pension pot, up to a maximum of 25% of the 2022-23 standard lifetime allowance (£268,275). 

The lump sum and death benefits allowance limits the amount of tax-free lump sum that can be paid both in lifetime and on death. The lump sum and death benefit allowance (LSDBA) is set at £1,073,100 but can be higher for those with LTA protections.

What Does A Million Pound Pension Pot Buy

A pension pot of £1,073,100 using recent annuity rates at age 60 could buy:

• Single Life policy with a 3% escalation each year would get you about £43,782

On top of that you would get your state pensuion of around £11,000. So you opwuld ghave a total income of around £55,000. But you would have to pay tax of around £9,500 on that, reducing your £55K to around £45.5k

So as million pounds pension pot plus your state pension, after tax - get's you about £45.5k

Possible Changes

This is a very expensive for the government and there is big pressure to reduce this tax advantage, that is particularly true if the Conservatives lose and a new government come in. The Conservatives have said they won't bring the LTB again, but times change and who knows.

The Institute for Fiscal StudiesThe pensions tax regime is still overly generous to those who already have big pensions, those with high retirement incomes and those getting big employer pension contributions,” the IFS said. “There is therefore a case for Labour’s proposed reinstatement of the lifetime allowance and, were Labour to form the next government, it would be best advised to implement any reform swiftly.” (Note: on 10/6/24 Labout were reported as saying they would not re-introduce the LTA)

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Possible Tax Changes - That Haven't Been Mentioned...Yet

It seems to me that all parties are boxing themselves into a corner - more money is going to be needed and yet they say they are not increasing the main taxes. One possible solution would be to reduce the higher rate tax relief on pension contributions - so that you don't penalise people on taking money out but don't reward them as much, for putting money into their pension.

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How People Are Reacting

Savers are being urged to avoid hastily withdrawing large sums of money from their pension pots in response to speculation over a potential tax raid. “A new lifetime allowance would require another set of transitioning rules for those who have already acted based on the existing legislation,” said the The Investing and Saving Alliance.

If you take the money out of your pension and no change happens, you may have created a major disadvantage and you can't just put the money back in - so think about this very carefully before you do anything.

State Pension May Start Being Taxed

Tax thresholds are currently frozen until 2028, which means that if the full new state pension keeps rising from its current level of £11,542 per year, many pensioners who rely on it as their only income could end up being above the threshold, and have to pay income tax.

£12,570 is the tax free allowance - so pensioners might soon be taxed.

WASPI Women

One of these issues is the WASPI (Women Against State Pension Inequality) campaign. Women affected by major changes to the state pension age demanding that the next prime minister sets out a compensation plan within 100 days of entering No 10.

There are an estimated 3.6 million so-called Waspi women who had expected to start receiving their pension at 60, but had to wait another five or six years due to increases in their state pension age to equalise it with men’s. State Pension age is now 66.

There are calls from the campaign for compensation because of the way the change was communicated, but so far, neither major party has committed to this.

The Parliamentary Ombudsman did suggest they might be offered some compensation - but that hasn't been confirmed.