No change on the frozen pension lifetime allowance –The cost of living crisis goes beyond day to day living costs as people’s ability to save is under pressure too
Jenny Holt, Managing Director, Customer Savings & Investments at Standard Life, part of Phoenix Group said: “A year ago the Chancellor announced a freeze on the total amount that people would be able to save tax efficiently in a pension. At the point this measure was announced, the annual rate of inflation was less than 1% but this figure has since spiralled to over 6%.
“The sum was capped at £1.073m to 2026. During a cost of living crisis this sounds like a huge sum of money but the reality is that an increasing number of middle income earners who have saved regularly over the years will be caught by this, particularly if they are or have been saving into a defined benefit scheme. With inflation rising, the real value of this allowance is dropping fast, and while the impact isn’t immediate, it’s one of the more subtle ways in which households are being squeezed.
“Given the more immediate pressures on many households, particularly in relation to energy prices, it would be surprising if the Chancellor had changed track with the lifetime allowance freeze. The unfortunate reality is that the lifetime allowance punishes an increasing number of people for doing the right thing and saving, and long-term it’s a limit we would like to see scrapped.”
Pension tax relief unchanged – any reform would require careful consideration
Jenny Holt, Managing Director, Customer Savings & Investments at Standard Life, part of Phoenix Group said: “The prospect of reform of pension tax relief looms large ahead of any Budget from the Chancellor as it’s been earmarked as an area of potential savings by the Treasury a number of times. However, changing such an important element of the pension system requires careful consideration and should be done in collaboration with the industry allowing sufficient time to support a smooth transition and implementation.
“There are a range of issues to consider here such as how any reform would be understood by savers and the potential to rebrand tax relief as something more intuitive to savers and how reform would be applied to DB schemes where there is a great deal of complexity. If pension tax relief were to move to a flat rate, there’s potential to introduce this at a level which provides a stronger incentive to lower earners to save whilst still making pensions attractive to higher earners.
“If a flat rate were introduced we would favour this being accompanied by the removal of related allowances, particularly the lifetime allowance, as the current system punishes an increasing number of savers who do the right thing and save regularly over their lives.”
Chancellor sticks with move to a state pension ‘double lock’ – uprating is now significantly below the rate of inflation
Jenny Holt, Managing Director, Customer Savings & Investments at Standard Life, part of Phoenix Group said: “Towards the end of last year it was confirmed that the triple lock that has applied to increases to the state pension recently will be suspended for a year. The state pension has been rising at the highest of earnings, CPI inflation or 2.5%, but due to the distortions in the labour market caused by the pandemic this would have led to around an 8% increase this April. As the earnings element of the calculation has been removed this year, pensioners are on course to see their payments rise in line with September’s inflation figure of 3.1%.
“However, in the months since this decision was made inflation has risen significantly and now stands at 6.2% with the Chancellor saying it would average 7.4% this year. These figures are averages and won’t reflect even bigger increases on certain goods like fuel where the Chancellor felt the need to intervene with a fuel duty cut. Given those in receipt of the state pension typically live on a fixed income, rising prices are likely to be particularly painful. It looks as though the Chancellor felt it was too late to change track on the state pension and is instead looking to offset the cost of living crisis via measures like raising the NI threshold which few pensioners will benefit from. The news yesterday that the triple lock will be reinstated next year is positive but the next twelve months will stretch the finances of many of those in receipt of the state pension.”
Increase to the National Living Wage will bring more people into scope for auto-enrolment
Colin Williams, Managing Director, Pensions and Savings at Standard Life, part of Phoenix Group said: “One policy that didn’t receive much attention in the Chancellor’s speech was the increase to the National Living Wage that will take effect from April 6 and apply to those aged 23 and over. The increase in earnings from £8.91 to £9.50 is worth around £1,000 to those working full time and will help with the cost of living squeeze. An additional bonus is that anyone working 21 hours a week or more triggers the £10,000 earnings threshold at which they must be enrolled into their workplace pension. While people must pay into their pension, unless they opt out, they will also benefit from at least a 3% pension contribution from their employer which is a significant incentive.
“We would encourage the Chancellor and the DWP to go further with auto-enrolment and in time remove the £10,000 earnings trigger so that people have the option to benefit from pension contributions regardless of income. The same applies to the current age limit of 21 which we think could be reduced to 18, providing people with a longer time horizon to build their savings.”
Addressing the guidance and advice gap
Andy Curran, CEO of Standard Life, part of Phoenix Group, said: “In the run up to the Budget it was rumoured that the Treasury was planning to consult on the definition of guidance and financial advice. We are disappointed that there was no further mention of these plans today as we believe change is needed.
“The majority of savers are taking crucial decisions without any professional advice or guidance. IFAs are the gold standard for advice and Pension Wise is valuable - however they are constrained to talking just about pensions. We know that at least 50% of people approaching retirement plan on using assets other than pensions which adds complexity and the need for advice or guidance.
“Urgently addressing this growing problem will require us all to play our part. We stand ready to work with Government, regulators, IFAs, industry and consumer groups to explore solutions so that everyone gets the level of help and support they deserve.”
Steven Cameron, Pensions Director at Aegon said: “Pensioners received little in the way of good news from the Chancellor in his mini Budget. There was nothing new in the way of temporary support specifically for this group, and no improvement on the 3.1% increase in the state pension from next month, which is just half the current rate of inflation. Added to this, those above state pension age don’t pay National Insurance on earnings so won’t benefit from the £3000 increase in the NI threshold.
“One possible help could have been to offer a bigger increase to the state pension this April in return for a lower rise next April. For example, the Chancellor could have raised this year’s increase by 2.5% to 5.6% to bring it closer to the current rate of inflation, then granting 2.5% less than whatever the triple lock rise would have been next April. The triple lock pays the highest of earnings increases, price inflation or 2.5%. So if, as is being predicted, price inflation were 8% next September, state pensioners would still have received 5.5% next April. It would have meant their state pension from April 2023 would have been the same, but they would have benefitted from an extra 2.5% for the next 12 months.”
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