Steven Cameron, Pensions Director at Aegon comments: “The government’s decision to cut the basic rate of income tax from 20% to 19% from April 2023, a year earlier than planned, will mean millions can keep more of what they earn. However, income tax thresholds are currently frozen until 2026 and over time, wage increases mean people are paying tax on more of their income, and in some cases are being dragged into paying higher rate tax. This is a particular issue in the current climate as soaring inflation has accelerated wage increases.
“While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds. Unfreezing these would be a much more powerful lever to support lower and modest earning households. For anyone earning under £37,670, increasing the basic rate threshold by 10%, around the current rate of inflation, would offer a greater income tax saving than cutting the rate of income tax from 20% to 19%.
“Aegon analysis shows that a 10% increase in the current threshold for paying basic rate income tax would save people earning above £13,827 around £250 over a year in income tax. This is based on the basic rate of income tax of 20% in England.
“Different income tax rates apply in Scotland, so individuals will have to wait to see if the Scottish Government makes equivalent changes.”
Andrew Tully, Technical Director at Canada Life said: “Reducing the basic rate of income tax will cost the Treasury around £5bn a year, while scrapping the additional rate of tax will cost about £2bn so these are both hugely significant tax cuts. There is a pension planning opportunity for those who can afford to make pension contributions in the current tax year. Additional rate taxpayers will get 45% relief, whereas next year contributions will only receive 40% relief. Similarly, basic rate taxpayers can obtain 20% relief on contributions this year, which will fall to 19% next year.”
Commenting on the announcement in today’s Budget around levelling up and charge cap, Callum Stewart, Head of DC Investment, Hymans Robertson says: "We welcome the government’s continued commitment to exploring how they can remove barriers to investing in illiquid assets and its inclusion in the first Fiscal Statement from the new Chancellor. We believe some “illiquid” assets can improve member outcomes at retirement and as schemes become larger, the more traditional problems such as daily liquidity are likely to be less of a challenge. As with any investment, it will be critical to explore where these asset types can add most value for members through their pensions journey and not simply regard them as a panacea.
“We acknowledge that more investment in illiquid assets investment by DC schemes could make a big difference in society given their potential to contribute to projects such as renewable energy. If we can also use this as a way to engage members in their pension savings – because they can physically see the good their money is doing – we can also potentially encourage them to contribute more to their pension savings. This will add to an improvement in overall long term outcomes.
“However we remain concerned that at a time of further worry for many, comments around charge cap are merely covering up the worries of many. Within the industry, we are afraid that pensions savings will be the first thing to be cut for many, leading to an ever increasing number of pensioners and future pensioners heading into pensioner poverty. Tinkering around the edges won't address these big issues. We would advocate a material overhaul of the auto-enrolment legislation, with much more done to encourage individuals to forward plan and invest in their pensions and enable them to do so when their position improves. We also need to move the dial on investment approaches, with more focus on embracing potentially significant opportunities to improve outcomes, rather than tinkering with the minutiae in the regulations. Without this, we are not going to address the concerns for many and support much better long term outcomes.”
Commenting, Jon Forsyth from LCP said: “The vast majority of DB schemes will find themselves in a better funding position this year than last, and today’s announcements are likely to reinforce that trend. If long-term interest rates continue to rise, deficits will tend to fall, and for some schemes this could bring forward the potential to buy out or buy in some of their liabilities. The impact of other Budget measures such as the scrapping of the Corporation Tax increase will have a less clear cut impact, as firms will get less relief than expected on pension contributions. But overall today’s statement is likely to lead to an improvement in DB scheme funding”.
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