Pension: Expert gives advice on preparing for retirement
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The Chancellor the Exchequer, Rishi Sunak is set to announce his Autumn Budget today, as British savers wait to see how any changes will impact their finances. It is believed that one such change could be a reduction in the annual allowance.
The annual allowance limits how much people can contribute towards their pension pots each year. The threshold currently stands at £40,000, with savers who breach the upper limit incurring 55 percent charges.
Tom Selby, head of retirement policy at AJ Bell, believes there is every chance Mr Sunak could implement a change to the annual allowance within his Autumn Budget.
He said: “If the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull. The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances as well.
“Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions.”
As Mr Selby pointed out, a reduction to the annual allowance would not appear to impact many people, but this may not be quite true.
Such a change could go under the radar as many people could not imagine they would ever contribute the current limit of £40,000 towards their pension in just one year. However, for those whose income has not been relatively fixed throughout their working life, the flexibility of being able to deposit up to £40,000 in any given year could be vital.
For example, those who run their own business may not prioritise their pension savings during the majority of their career, instead planning to sell their company when they wish to retire and using those funds to pay for their retirement.
By cutting the amount these people could contribute towards their retirement savings in a given year, a spanner could be thrown into the works of this plan and lead to people being hit with tax charges for going over the threshold.
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Fuelling the fears around a potential cut to the annual allowance is the fact the Chancellor has already made an alteration to the lifetime allowance, which works in the same way as the annual allowance, but over the course of one’s entire life.
The lifetime allowance is currently £1,073,100, but has previously always increased in line with inflation. However, this will now not happen, with the threshold confirmed to be staying at the same level until 2026.
Mr Selby believes that because of this change, there is less likelihood of the lifetime allowance being tinkered with again at Budget.
He said: “The lifetime allowance could also potentially be reduced, although given it was frozen for the rest of this Parliament at just over £1 million at the last Budget this seems highly unlikely.”
Much like the annual allowance, many people view 1,073,100 as an amount of money they would not be able to amass. But that may not be the case, as plenty of people who would not consider themselves extremely wealthy could get close to, or exceed this limit.
In fact, 1.2 million people were believed to be already on the way to going over the threshold and therefore being hit with tax charges. Following the freeze to the lifetime allowance, it is expected that now 1.6 million people will fall foul of this rule, according to calculations by consultancy company LCP.
That would mean 400,000 more people being charged for saving too much as a result of Mr Sunak’s change, which will keep the £1,073,100 lifetime allowance as it is for the next five years.
So it appears that like with the annual allowance, the current cap is not an unrealistic amount for people to save after all.
Back in the 2011/12 tax year, the lifetime allowance was £1.8million, but it has decreased in recent years down to the current limit. Another cut had been considered at one point earlier this year, which could have taken it down even further to £800,000.
In particular, those who have £300,000 or more in pension savings as present could be running the risk of going over the limit in the future. Worse still, even if they stopped saving towards their pension for the rest of their lives at this moment, they could still breach the threshold based on the returns from their current investments alone.
It is believed that people in their 40s are especially at risk, with more than 160,000 people on course to go past the limit. This issue could impact men more than women because of a general chasm between the size of the pension pots of men and women.
There have been calls for the lifetime allowance to be completely done away with, meaning Britons could save as much as they want with no risk of charges. However, the latest developments appear to represent the Government doing quite the opposite.
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