After the decisive general election result in December, the Chancellor will deliver his first Budget speech of the new parliament on 11 March.
With a sizeable majority in place, the Conservatives are expected to announce a raft of proposals to meet their manifesto commitments. And, with a Pensions Bill already announced in the Queen’s Speech, there could be changes on the horizon.
So, what could happen to pensions in the Budget?
The Tapered Annual Allowance could be changed or abolished
In recent months there have been lots of headlines about NHS staff turning down shifts because of potential tax bills for taking on additional work.
The Tapered Annual Allowance means that individuals with total earnings over £110,000 can face a reduction in the amount they contribute to their pension tax-free. Senior clinicians in the NHS have faced large tax bills if they contribute more than the Tapered Annual Allowance, preferring to turn down shifts than face a large retrospective tax bill.
The government has already announced an urgent review into the problem, and the Chancellor is expected to announce reforms in the Budget. One solution would be to scrap the taper altogether, although this could be politically difficult as it would essentially mean that all high earners would benefit.
Instead, Rishi Sunak might decide to raise the threshold at which the taper begins, from the current level of £110,000.
The Lifetime Allowance could increase
The Lifetime Allowance increases every April based on the Consumer Prices Index rate to September of the previous year.
This means the Lifetime Allowance is expected to increase from £1,055,000 to around £1,075,000 in April 2020 for Defined Contribution pensions.
Of course, the Chancellor could also make changes to the Lifetime Allowance as part of wider pension reforms.
Lower earners could benefit from pension rule change
Currently, two million lower-income earners miss out on 20% tax relief because of the ‘net pay’ scheme their employer puts them into.
Under this arrangement, which affects many part-time or lower-paid workers, employees pay their pension contribution before tax has been deducted.
Compare this to a ‘relief at source’ scheme which takes the pension contribution after tax has been paid, and also benefits from the tax relief that is added to the worker’s saving by HMRC.
Pension experts want the Chancellor to change the rules to protect these workers. Steven Cameron, Pensions Director at Aegon, says: “The lowest earners deserve every help they can get to save for their retirement.”
The State Pension triple lock will be retained
The Conservatives have committed to retaining the State Pension triple lock, which increases the amount of the State Pension annually by:
- The rate of inflation
- The rise in the rate of earnings
In April, the new State Pension will rise by £6.58 per week to £175.18. The Basic State Pension will rise by £5.04 per week to £134.24.
Change to Child Benefit rules to help State Pension entitlement
Many parents lose their State Pension credits each year because they don’t fill in the required paperwork to maintain their State Pension entitlement if one of them is a higher earner, and so they aren’t entitled to get Child Benefit payments.
The Office of Tax Simplification has said that people ‘can easily disadvantage themselves’ under a system that ‘appears illogical’ and ‘is inherently confusing’, and have called on the government to find a way to restore State Pension credits to parents who have lost them. This is another change that could happen in next month’s Budget.
National Insurance changes could leave you with pension issues in the future
One of the main pledges in the Conservative manifesto was to increase the threshold for paying National Insurance Contributions. This is widely expected to be announced in the Budget and will save everyone earning over £12,600 about £100 a year.
However, taking some workers out of paying National Insurance contributions could result in problems later on.
This is because individuals need 35 years of National Insurance contributions in order to qualify for the full State Pension. If workers under the threshold pay no National Insurance, they could miss out on qualifying years, and end up with a lower State Pension in the future.
Get in touch
If you have any questions about what might change in the Budget, or you have queries about your pensions and retirement planning, please get in touch. Email at firstname.lastname@example.org or call 0800 0787 182.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.