After several delays and the appointment of a new Chancellor, the Budget was finally delivered. Whilst many of the measures focused on tackling the coronavirus outbreak, there were some changes to pensions that could have an impact on your retirement planning.
Rishi Sunak delivered his first Budget on Wednesday 11th March and there were three key announcements relating to pensions that will come into effect for the 2020/21 tax year.
1. Increase to the Lifetime Allowance
The Lifetime Allowance is the threshold for tax-efficient saving over your lifetime. As expected, it was increased in line with inflation, the lowest amount the government could have increased it under current rules.
The 1.7% increase means the Lifetime Allowance has gone from £1,055,000 to £1,073,100. The Lifetime Allowance is important to keep in mind when adding to your pension as exceeding it will result in tax charges. Any excess that is withdrawn as an income, including an Annuity or Drawdown arrangement, will attract a 25% tax. If it’s withdrawn as a cash lump sum, the tax applied increases to 55%.
Understanding whether you’ll be affected by the Lifetime Allowance can be difficult. Not only will you need to consider your own contributions between now and retirement but how tax relief, employer contributions and investment returns will add up too. Financial planning can help you balance saving for retirement with minimising potential tax charges when accessing your pension.
2. Tapered Annual Allowance thresholds increase
The Annual Allowance dictates how much you can tax-efficiently save into a pension during each tax year. This is typically up to £40,000 or 100% of earnings. However, the Tapered Annual Allowance means high earners can see this allowance significantly reduced.
Previously, high earners would see their Annual Allowance reduced by £1 for every £2 of adjusted income exceeding £150,000. The Tapered Annual Allowance also applied to individuals that had a threshold income (the gross income minus any tax relievable contributions) above £110,000.
The Tapered Annual Allowance has become controversial over the last year following news that senior clinicians within the NHS were turning down overtime or leaving their pension scheme to avoid additional tax bills. Emergency measures were introduced in December 2019, with the government covering the bills of NHS staff that were affected.
There have been calls for the Tapered Annual Allowance to be scrapped. But the Chancellor didn’t go this far, instead opting to raise the thresholds.
For the 2020/21 tax year, both the adjusted income and threshold income have been increased by £90,000. This means anyone with an income under £200,000 will not be affected by the Tapered Annual Allowance. According to the Chancellor, this will take 98% of consultants and 96% of GPs out of the taper altogether.
3. Minimum Annual Allowance lowered
Whilst the increase in the Tapered Annual Allowance means many higher earners will be able to save more tax-efficiently in their pension, some will be affected by a lowering in the minimum annual allowance.
In the current tax year, your Annual Allowance can be lowered to a minimum of £10,000. So, as your allowance reduced by £1 for every £2 earned, you’d reach the minimum if you earned £210,000. However, from April 2020, the minimum annual allowance will now be lowered even further to £4,000. So, if you earn in excess of £312,000, your Annual Allowance can reduce significantly in the new tax year.
As a result, it’s important that high earners keep this allowance in mind to avoid potentially hefty tax charges and begin to look at other efficient ways to build a nest egg for retirement if they’ll be affected.
Reviewing your financial plan with the Budget changes in mind
The latest changes in the Budget highlight why it’s important to review your financial plan at regular intervals. Even if your circumstances and goals remain the same, legislation and regulation can have an impact. In some cases, making adjustments to your plans will be necessary to continue getting the most out of your savings.
It’s not just pensions where the Budget may have an impact either. Other changes for the upcoming tax year announced by the Chancellor could mean adjustments are needed to your investments, for instance, and may also present new opportunities.
Taking the time to review your finances and retirement planning now can help you start 2020/21 on the right path for you. Please contact us to discuss how the Budget may have affected your financial plans.
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. 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.