Autumn Statement: Annual and lifetime pension allowances slashed
The Chancellor will reduce the annual and lifetime pensions allowances from 2014-15, as widely expected.
George Osborne today announced in the Autumn Statement that the maximum amount an individual can save into their pension during their lifetime and receive tax relief would be cut from £1.5 million to £1.25 million.
The amount that can be contributed into a pension each year will be trimmed by a fifth, from £50,000 to £40,000.
The cuts had been widely expected by the pensions industry.
Announcing the cuts, Osborne said: "This will reduce the cost of tax relief to the public purse by an extra £1 billion a year by 2016-17.
"98% of people currently approaching retirement have a pension pot worth less than £1.25 million. Indeed, the median pot for such people is just £55,000.
"99% of pension savers make annual contributions to their pensions of less than £40,000. The average contribution to a pension is just £6,000 a year.
"I know these tax measures will not be welcomed by all; ways to reduce the deficit never are. But we must show we're all in this together."
By the 2017-18 tax year the cuts will boost the public purse by £1.125 billion.
The government says it will offer a fixed protection regime to prevent any retrospective tax charges to individuals from reducing the lifetime allowance.
Any pension savings that exceed the lifetime allowance has a charge applied of up to 55%. The charge on pension money above the annual allowance depends on any other taxable income that the individual has.
Matthew Phillips, managing director at Broadstone Pensions & Investments, criticises today's announcement, saying it sends out "a completely mixed message on pension saving".
He comments: "A major problem for people in this country is how to fund their retirement by making adequate provision for themselves rather than relying on the state.
"We absolutely have to encourage pension saving in this country as this will make the necessary changes to the state retirement age far more palatable."
Jonathan Lipkin, associate director, pensions and research, at the Investment Management Association, agrees, saying: "Piecemeal changes will do little to build confidence in the consistency and durability of the UK pensions and long-term savings regime."
As the change does not happen for almost 18 months, experts advise that anyone approaching the annual allowance, for example high earners or those with final salary pension schemes, should remember to make use of the "carry-forward' rule, whereby the previous three years' allowance can be carried into the current year's allowance, if they have not been used.
Prudential's retirement expert Vince Smith-Hughes comments: "Topping up pension payments before the legislation comes into effect, and utilising carry-forward where applicable will enable people to make the most of their pensions contributions."
The Chancellor also confirmed that the basic rate state pension would increase by 2.5% next April, which will mean an extra £2.70 a week to bring the weekly pension to £110.15.
The increase is higher than average earnings and inflation.
Most other working age benefits and tax credits will be increased by just 1% for three years from April 2013.
However, the additional state pension and those specifically for disability and carers, will continue to be uprated in line with prices.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.