What the mini-Budget means for your retirement

Published on October 17, 2022 by Andrew
The Downing Street sign

On 23 September Kwasi Kwarteng delivered his first, and only, major announcement as UK chancellor. 

The “fiscal event” triggered a strong reaction from global markets and damaged investor confidence. The result was a plummeting pound and swift action from the Bank of England (BoE). It also resulted in Kwarteng’s sacking just 21 days later.

Since then, current chancellor Jeremy Hunt has reversed many of the Growth Plan’s major announcements. 

And while pensions were far from prominent in Kwarteng’s original announcement, whether you’re currently in or approaching retirement, there could be some knock-ons you’ll need to consider. 

Keep reading for a look at how pension policy currently stands. But first, a look at the pension announcements that were absent from the mini-Budget.

Many pension allowances remain frozen despite spiralling living costs

Back in March 2021, Rishi Sunak froze several tax allowances in a bid to claw back some of the government’s coronavirus overspending. 

Among the allowances frozen until at least 2026 was the Lifetime Allowance (LTA). A cap on the amount you can withdraw from pension funds in your lifetime, exceeding the £1,073,100 LTA could result in a tax charge of up to 55%.

The allowance had previously risen each year, in line with inflation. Before his mini-Budget statement, rumours abounded that Kwarteng might be considering unfreezing the allowance and returning to the inflation-linked approach. These rumours proved unfounded.

The LTA freeze is expected to raise nearly £1 billion in additional revenue for the Treasury as increasing numbers of pensioners get caught by the charge. This could be especially problematic during a period of high inflation.

If you think this could be you, be sure to contact your adviser now.

The Personal Allowance – the amount you can earn before Income Tax becomes payable – was also absent from Kwarteng’s mini-Budget announcement. The allowance remains frozen until 2026, as do the nil-rate band and the residence nil-rate band, both of which could severely affect your Inheritance Tax liability over the next four years.

Tax cuts could have an unexpected effect on your pension savings 

One of the most high-profile and controversial announcements the then-chancellor did make was the scrapping of the 45% additional rate of Income Tax. 

The outcry over this decision – seen as unfairly benefiting the wealthy during a period of financial struggle – led to a U-turn just 10 days later and no doubt played a part in his sacking just 21 days into the job. 

Kwarteng’s other Income Tax announcement has also been overturned.

In March 2022, Rishi Sunak announced that he would look to cut the basic rate of Income Tax from 20% to 19% in 2024. Kwasi Kwarteng brought this forward. Jeremy Hunt has now confirmed that the basic rate of tax will remain at 20% “indefinitely”. 

While this is bad news for the Income Tax you pay, a drop to 19% would have lowered the tax relief on your pension contributions. Under Hunt’s amendment, contributing £100 to your pension as a basic-rate taxpayer will still cost you just £80. The extra £20 will continue to be topped up by the government. 

Bank of England intervention spells good news for your final salary scheme 

If you have a defined benefit (DB) or “final salary” pension, you will likely have read about the BoE’s intervention following the mini-Budget.

The BoE has stepped into the market, stating that it was prepared to spend up to £65 billion on long-dated UK government bonds. It has since announced a plan to bolster its emergency bond-buying, quoting a “material risk to UK financial stability” were it not to do so. 

When bond yields rise quickly, DB pension schemes – that tend to own so-called “liability-driven investment” (LDI) funds – panic. This is because the schemes need to provide more cash to the LDI funds. 

Following Kwasi Kwarteng’s mini-Budget, yields on these government bonds were forecast for a sharp rise. 

This left the BoE with no choice but to step in to ensure that the risk of funds “going bust” subsided, and there is now little risk of your DB pension not being paid in full. 

As the market reaction continues, further intervention from the BoE can’t be ruled out, despite a new chancellor being in place.

Get in touch

Kwasi Kwarteng stated that his mini-Budget was based on tax cuts to boost growth while maintaining responsible public finances. Market reaction – and the response of Liz Truss – confirmed that the chancellor overstepped. 

By not keeping a firm enough grasp on his fiscal responsibilities, he spooked the market, resulting in a loss of confidence and an unwillingness for overseas investors to invest. The sharp fall of the pound against the dollar and the need for the BoE to step in highlighted that uncertainty.

Jeremy Hunt is now working to rebuild confidence, but in the meantime, though, it is important to remember not to panic. The UK has structures in place to protect your money – and the UK’s global reputation – and the overall impact on your long-term plans will likely be very small.

If you have any concerns about any aspect of your retirement, whether or not it relates to the recent mini-Budget, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182. 

Please note

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. 

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