Pension Budget changes: Did Rishi Sunak mention pensions? What does it mean for you?

Budget 2021: Rishi Sunak leaves Downing Street

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Chancellor Rishi Sunak’s long-awaited Budget announcement was made today in the House of Commons. This year’s Budget is particularly significant as the Government is expected to announce measures that will balance the books after a year of significant public spending due to COVID-19. In the weeks building up to the announcement, many suggestions have been floated as a means of plugging the UK’s deficit – including the raising of taxes and alterations to pensions.

Did Rishi Sunak mention pensions? What does it mean for you?

Mr Sunak mentioned he would freeze the pension lifetime allowance in the Budget on Wednesday.

It was expected the pension lifetime allowance would increase slightly next year in line with inflation.

However, the Chancellor announced on Wednesday that until April 2026, Inheritance Tax thresholds, the pension lifetime allowance and the annual exempt amount in Capital Gains Tax will be maintained at their current levels.

The lifetime allowance is the amount people can save in their pension pot before tax charges kick in.

The lifetime allowance is currently set at £1,073,100 and people get tax relief up to this amount.

This means people will have to pay tax on the amount they have over this amount in their pension pots.

The freeze will particularly affect high earners, such as people in final salary pension schemes like doctors and headteachers. 

What changes could have been announced in the Budget?

In the run-up to the Budget announcement, there was speculation over how the Government could start to recuperate the billions of pounds spent on relief during the pandemic.

One such area which many experts believed could be targeted was pension tax relief.

In a report published prior to the Chancellor’s Budget announcement, MPs called on the Government to overhaul the “entire approach” to pension tax relief.

The House of Commons Treasury committee warned: “Given the regressive nature of the benefits accruing to individuals from the current arrangements on pension tax relief, especially those in the top earnings decile, the Chancellor should urgently reform the entire approach to pension tax relief.”

Simon Goldthorpe, joint executive chairman at Beaufort Group, said: “Pensions tax relief reform is something that has been discussed in political circles for some time.

“The relief is designed to incentivise people to save for their retirement by diverting some of the money you would have paid in tax into your pension instead.

“At present, higher rate taxpayers have a better deal, gaining 40 percent relief on their pension contributions, compared to 20 percent for basic rate taxpayers.

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“It has been suggested the Treasury could introduce a flat 20 percent rate of relief, saving it more than £20billion a year.”

It had also been suggested changes could have been made to how the State Pension increases are calculated.

Currently, the State Pension increases every year in line with the ‘triple lock’ introduced in 2010.

State Pensions increase in line with the percentage increase in average earnings, the Consumer Prices Index (CPI) or 2.5 percent – whichever is higher.

Anthony Morrow, co-founder of low cost online financial advice service OpenMoney, addressed whether there is likely to be any changes to pensions in the Budget this year.

Mr Morrow said: “Before every Budget, there are always rumours of changes to the way State Pension increases are calculated and cuts to pension allowances and tax relief, but given the state of the economy, the Government may finally feel compelled to act.

“While all sectors of society have been affected by the coronavirus crisis, there’s no escaping the fact that those already struggling financially have been hardest hit by the ongoing economic impacts of the pandemic.

“Now is surely the time to address the imbalance of benefits and tax breaks available to the wealthy in retirement, while ensuring poorer pensioners are protected from further financial difficulty.”

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