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

Pension changes in the Budget are expected to target keeping 50-somethings in the workplace for longer.

Rumours ahead of March 15 suggest Chancellor Jeremy Hunt could take a ‘carrot and stick’ approach to easing labour shortages, which politicians worry are hampering economic growth.

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

But on the pension front, Hunt is reportedly considering easing tax restrictions that push the better off into early retirement, while bringing forward a state pension age hike that would make it harder for the lower paid to afford to give up work. We round up potential changes below.

Retirement finances: Chancellor is reportedly considering easing tax restrictions on better off savers

Lifetime and annual allowances could be eased 

The Chancellor is reportedly considering an overhaul of the lifetime and annual allowances because higher paid professionals, notably much-needed experienced doctors, are opting for early retirement rather than face tax penalties for overshooting them.

There is talk that both allowances will be hiked or eased in some fashion in the Budget.

The LTA has created a disincentive for continued pension saving amongst higher earning professionals 

Jason Hollands, Evelyn Partners 

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

The rules are more complicated for higher earners, whose annual allowance is ‘tapered’ down to either £10,000 or £4,000.

The threshold income level, where people’s annual earnings start being calculated for the purposes of pension tax relief, is £200,000.

But the annual allowance starts being tapered down for people with an adjusted income level – which includes pension contributions – of £240,000.

For those with adjusted income of £300,000 or more, the taper will reduce the annual allowance to just £4,000.

The lifetime allowance or LTA is how much you can save into a pension and get tax relief in total, and is currently £1,073,100.

Jason Hollands, managing director at Evelyn Partners, says: ‘In the case of the LTA, investment growth is included so someone who has made wise investment decisions can be penalised with a tax charge which many will regard as unfair.

‘This has created a disincentive for continued pension saving amongst higher earning professionals and is a factor driving early-retirement decisions at a time when the economy faces the challenge of tightening labour market.

‘If we have to have an LTA at all, it is certainly far too low, given that it stood at £1.8million just 10 years ago and that since then inflation means incomes and savings have soared.’



Money purchase annual allowance: Rule stopping ‘pension recycling’ for tax gain

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

This is intended to put people off recycling their pension withdrawals back into their pots to benefit from tax relief twice.

But it is also a barrier to retirement saving for people who want to return to work and boost their pensions while doing so, 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 around 25 per cent of occupational defined contribution savers aged 55 and over.

‘The cap is designed to stop pensioners – who have already drawn down some or all of their pension – from receiving double tax relief by funding ongoing savings with their existing pension pots, which have often accrued without any taxation.’

How does it work now? The rule stops anyone who has made a withdrawal, over and above their 25 per cent tax free lump sum, from benefiting from valuable tax relief on contributions worth more than £4,000 a year from then onward.

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

Chancellor Jeremy Hunt could take a 'carrot and stick' approach to easing labour shortages

Chancellor Jeremy Hunt could take a ‘carrot and stick’ approach to easing labour shortages

‘There are good reasons to look again at the rule,’ says Dean Butler, a managing director at Standard Life.

‘A combination of the pandemic followed by cost of living crisis means many people will have dipped into their pensions for short-term purposes.

‘We believe an increase in the limit may help but its benefit will be limited to those on relatively large incomes and bigger questions have been raised as to whether it’s really health issues, or some people’s relatively good financial position that are keeping older people out of the workforce.’

State pension age: Rumours of earlier state pension age hike to 68

The Chancellor has reportedly looked at hastening the state pension age rise to 68 by 2035, which would force many people currently aged 43 to 54 to work longer.

The Government has mulled the timing of this change for years, but it has to make some kind of announcement soon so might well do so in the coming Budget.

What are the plans so far? Men and women’s state pension age is now 66 and between 2026 and 2028 it will rise again to 67.

Officially, the rise to 68 is set to happen between 2044 and 2046, but a previous Government review recommended the change should be brought forward to 2037-2039.

It then decided to have yet another look, and it is the outcome of this latest review that is now due.

When will you retire? State pension age rise to 68 could be brought forward

When will you retire? State pension age rise to 68 could be brought forward

‘On affordability grounds, the Government may argue the state pension age has to be increased to 68 sooner than currently planned, possibly in 10 to 12 years’ time,’ says Steven Cameron, pensions director at Aegon.

‘Increasing it even sooner would simply not give people enough time to plan ahead.’

‘The higher the state pension age is, the more difficult it will be for some people to remain in work till then.

‘An increase in the state pension age to 68 could also prompt the Government to increase the earliest age at which [private] pensions can be accessed to 58. It tends to be set 10 years earlier than state pension age and is already increasing from 55 to 57 in 2028, creating massive complexities.’