3 ways the employment drive among over-50s could be upsetting retirement plans

Published on July 13, 2023 by Andrew
A man holding a coffee cup at arm’s length and spilling his drink

When Jeremy Hunt presented his spring Budget in March 2023, his three main aims were to halve inflation, reduce public debt, and boost economic growth.

In fact, in his so-called “budget for growth”, it was his third aim that was, arguably, the most important. And one of the main ways Hunt hoped to boost the economy was by encouraging Brits back to work. 

Around 7 million UK adults are classed as “economically inactive”, with more than a million of those early retirees, many as a result of the pandemic. This could be you.

As the government looks to woo you back into work, you’ll need to think carefully about your long-term plans and three key ways that the government’s changes could affect them.

1. Changes to the Lifetime Allowance and Annual Allowance might mean you stay in work for longer

You probably read your April Budget update, 3 spring Budget changes and what they mean for your retirement, in which we broke down the chancellor’s main pension announcements.

These included:

  • An increase to pension Annual Allowance from ÂŁ40,000 to ÂŁ60,000 from the 2023/24 tax year
  • Increases to the Tapered Annual Allowance (TAA) and the Money Purchase Annual Allowance (MPAA)
  • The removal of the Lifetime Allowance charge ahead of its complete abolition in 2024.

The government estimates that around 15,000 individuals will stay in the labour market as a result of these changes. 

Many of those remaining in work are likely to be highly-skilled workers, including senior doctors, for who the LTA in particular has long been contentious.

If your high earnings mean that you were in danger of breaching the LTA or triggering the TAA, you might find that you can afford to keep contributing to your pension thanks to changes.

You’ll need to think carefully about the effect of this decision on any HMRC protection you hold, especially regarding your tax-free cash entitlement.

The maximum (unprotected) tax-free cash you can take has been frozen at 25% of the 2022/23 LTA, which amounts to ÂŁ268,275.

Remember that money held within your pension is usually exempt from Inheritance Tax (IHT) so you’ll have to think carefully before releasing funds.

HMRC protection, IHT, and the TAA are all complicated areas so be sure to get in touch with your The Pension Planner adviser before you make any important decisions.

2. You might find that the ability to save more means you can retire earlier than planned

The Annual Allowance is a cap on the pension contributions you can make in a tax year while still receiving tax relief.

This government top-up is a key part of your pension’s tax efficiency. And the increase to £60,000 effectively gives you another £20,000 of tax-efficient contributions each year.

If your retirement is still years away – and you can afford to take advantage of the new limit – you could find that upping your contributions allows you to retire earlier than planned.

We can help you budget for increased contributions in the present while putting an amended plan in place for your future. This will include forecasts for a longer retirement to ensure that you can maintain your desired standard of living from your retirement date and for the rest of your life.

3. Your pension could be key in your estate and IHT planning 

As we touched upon earlier – and in our Budget update article – Jeremy Hunt’s changes could increase the role your pensions have to play in estate planning. This is because untouched pension funds usually sit outside of your estate for IHT purposes.

By effectively removing the cap on the amount you can save (within the Annual Allowance), the government has created an IHT sanctuary within your pension.

You’ll need to think carefully about how much you place into the pension pots and when you access them. Paying for your retirement using non-pension funds like ISAs or buy-to-let income, for example, could allow you to leave more of your pension untouched for longer. 

While the money will still be there if you need it, you’ll also have peace of mind that it can be passed on without incurring IHT at 40%.

Under current rules, the whole of your unused pension pot can be passed to a chosen beneficiary tax-free on your death, if you die before age 75. On death after 75, your chosen beneficiary can still receive your unused pension funds but they will pay tax at the highest rate they pay.

Remember that a pension beneficiary is nominated via an “Expression of Wish” form available from your pension provider. 

Get in touch if you’d like to discuss tax-efficient ways to hold your pension wealth.

Get in touch

If you have any worries about recent Budget changes and their potential impact on your retirement plans, get in touch now. Email info@thepensionplanner.co.uk or call 0800 0787 182. 

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Your pension income could also be affected by the interest rates at the time you take your benefits. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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