PENSIONS POT
Autumn Budget pension changes 2021: Five reforms explained including tax relief top-ups for low earners
CHANCELLOR of the Exchequer Rishi Sunak has announced his Budget which sets out the economic plans for winter - but what does it mean for your pension?
In today's Autumn Spending Review, there were very few mentions of retirement and pensions, but there were a couple of announcements hidden in the full Budget documents.
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The biggest news is a change to the way pensions tax relief works, meaning a welcome boost for lower earners.
Sunak also unveiled a consultation on the charges cap, to try and boost investment in long-term infrastructure projects.
Here's everything you need to know about pensions announcements in today's Budget:
Tax relief boost for lower earners
The pensions tax relief system is supposed to mean that for every penny or pound you put away for retirement, the government will top up your savings.
How much tax relief you get depends on how much income tax you pay, meaning middle and higher earners tend to get a better deal.
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Someone who only pays basic income tax would get 20% relief from the government, while someone who pays additional rate would get 40%.
This is because there are two ways that employers can operate workplace pensions schemes, one is called "relief at source" while the other is "net pay".
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For higher earners, net pay works well because your pensions contributions come out of your pre-tax earnings, which means you pay less tax over all.
But for people who earn less than £12,570, it means they don't get any tax relief at all on their savings.
This is because none of their income would have been taxed anyway, so they don't benefit from the relief.
By contrast, with relief at source, 20% tax relief is added automatically, meaning low wage workers get a much-needed boost from the government.
Campaigners have been calling for reform for some time now, and Rishi Sunak has now confirmed a new system will be in place from 2024.
The reform will mean that lower earners will get government top-ups to ensure they're getting the tax relief they deserve.
The government is predicting this could boost pensions savings for low earners by £54 a year on average.
The government says the changes will impact 1.2million individuals, 75% of whom are women.
The top-ups will be paid after the end of the relevant tax year, with the first
payments being made in 2025-26 and continuing thereafter.
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Darren Philp, director of policy at Smart Pension, said: "In amongst the high profile announcements was an important change to the Pension tax system that will benefit over a million lower paid people, many of them women.
"By topping up the pensions of lower earners in net pay schemes the government is addressing a gross unfairness in the system. While the introduction of the new system is still some way off, this is a positive step forward."
Charges cap consultation for workplace schemes
The chancellor also announced that there would be a review of the charges cap for workplace pensions schemes.
In his Budget speech he said: "I'm announcing today that we'll consult on further changes to the regulatory charge cap for pensions schemes - unlocking institutional investment while protecting savers."
Workplace pension schemes that are used for auto-enrolment are currently subjected to a charges cap of 0.75%.
This was introduced to protect savers from hefty investment fees on their retirement savings, but it did mean that schemes struggled to invest in more expensive asset classes such as infrastructure.
In a bid to increase the money flowing into government infrastructure from UK pension, the government is planning to carry out a consultation on changing the charge cap.
This could mean slightly higher charges for UK savers, though it could also lead to higher returns.
It's not yet clear what reform could look like, but the Budget documents say it "will consider options to amend the scope so that the cap can better accommodate well-designed performance fees to ensure savers can benefit from higher return investments, while unlocking institutional investment to support some of the UK’s most innovative businesses."
Pete Glancy, head of policy at Scottish Widows, said: “[This is] a step in the right direction to help release the trillions of pounds invested in UK pensions, allowing them to play a greater role in helping Britain recover from the pandemic.
“Unleashing the UK’s pension savings on the country’s infrastructure and economic priorities could create a virtuous circle that benefits both businesses and savers.”
But other commentators were more cautious, saying any changes to the charges cap could erode value for money and push up costs.
Phil Brown, director of policy for B&CE, provider of The People’s Pension, said: “The workplace pension charge cap has driven down the cost of pensions across the industry. If the Government wants pension providers to invest in a broader range of asset classes to help deliver on its ‘levelling up’ agenda, it must first challenge the investment industry on the current cost of these, ensuring they’re fair and reasonable and provide value for money for the saver.
“By itself, changing the charge cap isn’t going to make schemes invest differently – a package of measures is needed – and any change to the cap must maintain an equivalent level of member protection in order to prevent a return to the problems of the past.”
Scrapping the pensions triple-lock
The government announced in September that it was planning to scrap the triple lock and this has been confirmed in the Budget costings.
The triple lock usually guarantees that state pension payouts will increase by the highest of inflation, average earnings growth, or 2.5%.
However, the coronavirus pandemic has pushed earnings figures artificially high as many people returned from furlough, so the government has scrapped that element of the lock.
Many people were hoping that the government would commit to an end date for the pause during today's Budget, but the documents only say that it will be in place for 2022-23.
The pause also applies to Pension Credit and survivors’ benefits in industrial death benefit, both of which will increase by the higher of CPI or 2.5%.
National Minimum Wage changes boosting pensions saving
The National Minimum Wage rise will also have an impact on people’s pensions as minimum contributions under automatic enrolment will also go up.
AJ Bell has calculated that someone earning today's minimum wage would pay employee contributions of around £445 over the course of the year, with their employer paying in £334 and a further £111 coming from basic-rate tax relief.
Under the when the minimum wage rises from £8.91 per hour to £9.50 per hour from April next year, the amounts contributed will rise sharply.
Tom Selby, head of retirement policy at AJ Bell said: “Assuming relevant earnings remain the same in 2022/23, minimum employee contributions will rise to around £491, with their employer adding £367 and a further £123 coming via tax relief*.”
Delays to the Pension Credit - Housing benefit merger
The government’s plans to create a new housing element of Pension Credit, replacing pensioner Housing Benefit have been delayed.
The changes were planned for April 2023 but are now intended to take effect in 2025, to align with the full rollout of working-age Housing Benefit into Universal Credit.
Pensions experts call for further reforms
Even though there have been some changes to the pensions systems, many experts are saying that the reforms don't go far enough, particularly when it comes to protecting lower earners and women.
There is also widespread disappointment that the government has not taken steps to make the pensions system less complex.
Here are three areas where experts are still calling for reforms:
One are that pensions experts are keen the government tackles is the complicated Money Purchase Annual Allowance (MPPA) system.
Under the current rules you can save £40,000 a year into your pension, but the MPAA limits future contributions to just £4,000 for people that have accessed their savings.
Rachel Meadows, head of proposition - Pensions and Savings at Broadstone added: "[There is a] missed opportunity to review Money Purchase Annual Allowance - essentially a stealth tax on ordinary people that might have needed to fall back on their pension savings during the pandemic. "
In its election manifesto, the conservative government committed to expanding auto-enrolment in the ‘mid-2020s’ by reducing the qualifying age from 22 to 18 and making changes to the minimum earnings thresholds.
At the moment, people are only automatically enrolled if they earn more than £10,000 with one employer.
Ian Love, head of institutional EMEA & Asia at SEI, a firm which provides investment management to pensions said: “Auto-enrolment means more people are saving into a pension than ever before. However, the rules mean that the low-paid, those with multiple jobs and the self-employed are excluded.
"Many of those are women, adding to the pension gender gap. We believe this is an opportunity to tackle inequality.”
- Support for older workers
Low pensions savings rates mean more people have to work for longer before their retire. Despite this, the coronavirus pandemic has forced lots of older employees out of the workforce.
Alistair McQueen, head of savings & retirement at Aviva said: "Saving more and working longer are the two most powerful ways of funding our longer lives in retirement, but the pandemic has driven a loss of 400,000 older workers from the labour market.
"Many will have experienced a hit to their retirement plans. £2bn has been invested in the Kickstart scheme for the under-25s. We must not forget the 10m workers over the age of 50.";
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