Almost every day before the Budget I heard that big changes to pensions were afoot. How will I be affected?
The prelude to this year’s Budget was a frenzy of speculation about the incentives the Government offers to save into a pension.
After almost a year of consultation, many expected the Chancellor to make quite radical changes to pension tax relief – the bonus the Government rewards you with for diligently saving for your retirement. There was talk of a reduction in the level of relief higher earners receive, as well as even deeper cuts to the amount of cash you can put away each year and over your lifetime.
Much to everyone’s surprise, these changes failed to materialise. There would be no reductions to tax relief, and no further cuts to your allowances – for now.
But if you’re a high earner, you’ll see the amount you can put into a pension each year – the annual allowance – fall. And everyone will see the lifetime allowance cut too. But will you be affected?
Read Saga's Budget coverage here.
The annual allowance ‘taper’
The first change will hit only the highest earners. If your income is £150,000 or more, which means you pay tax at the additional (highest) rate of 45% on anything earned above that amount, you’ll see the total you can pay into your pension each year reduced.
The current maximum annual allowance is £40,000. For high earners, though, the Government now applies a complex calculation to reduce the amount you can put into your pension. It will go down by £1 for every £2 you earn over £150,000, to a minimum annual allowance of £10,000. So, if you earned £160,000, your allowance would go down from £40,000 to £35,000. Those who earn £210,000 or more will see it capped at £10,000.
Some people who earn less than £150,000 could also be affected, as the calculation takes into account the amount your employer contributes to your pension, which may tip what’s called your ‘adjusted net income’ over the £150,000 bracket. As I say, it’s not straightforward and it’s worth getting professional advice if you think you’re affected.
Who were this year's Budget winners and losers?
The lifetime allowance
There’s also a limit on the overall amount you can save into a pension. And the lifetime allowance has now decreased from £1.25 million to £1 million.
The penalties for exceeding this limit are quite severe. Any savings you make above the lifetime allowance don’t receive tax relief, and you must pay a tax charge on the excess of between 25% and 55%, depending on how you withdraw the money from your pension. It’s vital, therefore, to keep an eye on what you’re building up.
There is some good news. Although the lifetime allowance will stay at £1m for the next two years, it will start rising again in line with inflation from April 2018 onwards.
Say inflation were to hit the Bank of England’s target of 2%; someone aged 50 in 2018 could see their lifetime allowance rise to £1.39m by the age of 65. A 55-year-old could see it rise to £1.19 million and a 60-year-old to £1.08 million.
Seven signs you need to get on top of your finances.
The super ISA
To offset the pension changes, the Chancellor shocked us all by announcing a significant rise in the ISA allowance.
Currently £15,240, it will increase to £20,000 in April 2017, meaning couples could save £40,000 a year and enjoy tax-free growth and pay no tax on withdrawals.
If your ability to save into a pension has been limited by this year’s changes, maximising your ISA could be a really effective way of boosting your savings tax-efficiently.
For more useful information, browse our money articles.
Have a question?
If you have any questions about SIPPs, ISAs or other investments, the friendly team of experts at Saga Investment Services are here to help. You can call them on 0800 033 4000. The team at Saga Investment Services are experts in investments and financial planning and can answer questions on these subjects only. Gareth cannot reply to individuals personally but will choose questions to respond to on this page.
IMPORTANT INFORMATION Capital at risk. This article is based on our interpretation of the Budget 2016 and related legislation; it is not intended as advice, and the impact of any changes to tax rates or allowances depends on your personal circumstances. If you are unsure whether an investment is suitable, please contact your adviser. Saga Investment Services Ltd is an Appointed Representative of Bestinvest (Brokers) Ltd, which is authorised and regulated by the Financial Conduct Authority (Reg. No. 2830297). Bestinvest (Brokers) Limited is part of the Tilney Bestinvest Group of Companies. 6 Chesterfield Gardens, Mayfair, London W1J 5BQ. Saga Investment Services Limited (Reg. No. 09308423) has registered offices at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE.
Subscribe to Saga Magazine to read Gareth's column every month.