jeremy hunt holding red budget box

Budget 2023: Pensions reforms and more

Amongst Chancellor Jeremy Hunt’s Budget announcements on Wednesday was confirmation that the annual tax-free allowance for pensions will be increased from £40,000 to £60,000 alongside the abolition of the lifetime allowance.

The measures, which are designed to encourage highly skilled workers to remain in the workforce, were described as “not inconsequential” by Jon Greer, head of retirement policy at Quilter.

Queer pointed out in advance of the budget that the rumoured increase of the lifetime allowance to £1.8 million – which turned out to be more conservative than Hunt’s abolition – would result in a benefit to an individual with a £1.8 million fund of over £181,000 in tax. However, he pointed out the flaws in Hunt’s plans:

“Both [changes aim] to get over 50s back to work, when arguably it may have the opposite for some who will be able to fund their retirement earlier.”

Explaining the issues with the now-abolished lifetime allowance, Greer added:

“The lifetime allowance is a simple and effective way of limiting tax-privileged pension saving over a lifetime but has some significant drawbacks. As it applies to the value of pension savings accumulated, including investment returns as well as pension contributions, people can inadvertently exceed the lifetime allowance even if they stop actively contributing while still some way below it. This is a little opaque and difficult for people to manage – and to some extent unfair. It can also lead to odd behaviours for example, leading them to invest their pension savings in lower-risk, lower-return assets or even to start withdrawing money from their pension earlier, in order to avoid accidentally exceeding the limit.”

He added that the measures “[remove] great swathes of complex transitional rules that were introduced when the limit was lowered periodically over the last decade”.

The measures were also welcomed by Simon Harrington, Head of Public Affairs at PIMFA:

“The steps taken by the Chancellor today in abolishing the personal pension lifetime allowance and raising the annual allowance to £60,000 will, in our view, provide consumers with the right incentives to both save for the future while also ensuring that some are not forced to make a decision between saving and investing and remaining in the workplace.

It is right, in our view, that having been frozen for so long, these allowances are reformed to reflect the modern day and we would encourage the Government to keep the annual allowance under review on a regular basis. Going forward, it is vital that any future policy should not negatively impact on the ability of people to save and invest and we would encourage the Government to look at other areas – particularly those that disincentivise individual share ownership – in future.”

However, on the news that Labour would immediately reverse the abolition if elected, another commentator noted the danger of playing “political ping-pong” with the pensions system.

“People plan for the long term and that relies on confidence the goal posts won’t constantly shift,” said Andrew Tully, technical director, Canada Life:

“We need cross party consensus on issues like this to deliver the stability required or else we seriously risk wrecking savers retirement plans.

There are already restrictions in the system limiting pension savings and tax breaks – just let the annual allowance do the job its designed to do.”

Other measures announced in the budget

  • UK to avoid entering recession in 2023, says the Office for Budget Responsibility (OBR)
  • Inflation set to fall to 2.9% by end of 2023 – it currently sits at 10.1%
  • Fuel duty will remain frozen and the 5p reduction is set to stay
  • Government debt to fall every year until 2027-28. Government currently operating in budget surplus
  • UK described as “best country to invest in after United States and China” and one of the best places in the world to do business
  • Overall tax burden to be slightly lower than previously predicted by the OBR
  • £600 for new childminders plus free childcare up to 30 hours per week to be extended to every single child over the age of nine months. Also improved childcare access for those on Universal Credit
  • 12 investment zones – “potential Canary Wharfs” – to promote levelling up
  • £8.8 billion for local transport funding
  • Investment allowance for small businesses upped to £1 million
  • SMEs able to claim £27 back for every £100 spent on R&D
  • AI sandbox to trial new, faster approaches to help innovators get new products to market. Also working closely with Intellectual Property Office and backed by £900 million funding for implementation
  • Children in care: qualifying care relief upped from £10,000 to £18,000
  • Cut corporation tax by £9 billion per year
  • New measures to encourage over-55s back into work

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