The UK pension Annual Allowance (AA) is to be increased from its current limit of £40,000 per tax year to £60,000 with effect from the 6th of April 2023. This was one of many measures announced by chancellor Jeremy Hunt in his Spring Budget statement on the 15th of March.
Although it is being increased, the UK pension annual allowance is still far lower than it once was. Back in the 2010-11 tax year, it was £255,000, and then in 2011-12, it was drastically lowered to £50,000 per tax year. It remained there until 2014-15, when it was again reduced to £40,000. This latest change is the first in 9 years.
The move will be welcomed by the UK’s high earners as it enables them to increase their retirement savings, thereby standing a better chance of being able to build a good pension pot for when they retire.
Another announcement aimed at the UK’s wealthier earners was the abolishment of the Lifetime Allowance (LTA). Before being abolished, it was already set way beyond the reach of most ordinary workers at £1.073 million.
While the high earners and wealthy will be rubbing their hands in glee as they plan how to modify their retirement planning strategies, there are those who criticise the changes to pension rules, saying that the ordinary man and woman in the street will see little if any benefit from the changes, and perhaps these critics have a point. If anything, when it comes to UK pension savings, these changes, which are said to only benefit 1% of the UK working population, only serve to widen the inequality gap.
According to ONS, the average total weekly pay for a UK worker is £630, which works out to £33,390 per annum. Their total salaries before cost-of-living expenses are taken out don’t get anywhere near the old £40,000 annual allowance, so the £20,000 AA increase to £60,000 means nothing to the average UK wage earner.
But it doesn’t mean to say that those on lower salaries can’t aspire to a financially comfortable retirement. The UK pension system took a huge step towards that when auto-enrolment in a workplace pension came into effect in 2012. It meant that in addition to the state pension, those who were in employment and received a salary of £10,000 or more have a pension savings vehicle, contributed to by themselves and their employers, whereby the funds are invested for growth.
The key is in investing the contributions. Money put into ordinary savings accounts doesn’t attract much interest, and when the rate of inflation is high, it loses value in real money terms quite quickly. Invested wisely, with a careful retirement planning strategy, it can outpace inflation and show a good return in the long term.
The raising of the UK pension annual allowance is one of the measures Mr Hunt announced to encourage people to stay in work longer. This and the abolishment of the LTA are also part of a strategy designed to get people who have retired (in their 50s, early 60s or at state pension age) back in the workplace.
Another plan announced by the government is to increase the age at which people can gain access to pension savings tax-free. At the moment, you are able to withdraw 25% from your pension pot tax-free at the age of 55. This is due to change to 57 by 2028.
As well as unretiring people and getting them back into the workplace, Mr Hunt said that the changes he has announced, removing the LTA charge from the 6th of April 2023 and fully abolishing the LTA from the 6th of April 2024, are to help retain the services of senior doctors in the NHS and stop other professionals from retiring early.
There has been plenty of opposition to the changes. Pat McFadden, the Shadow Treasury chief secretary, stated that most pensioners would not benefit from the announced changes as they won’t get within reach of the LTA by a long chalk.
Instead, Mr McFadden said that Mr Hunt should rethink his strategy in favour of focussing on a specific scheme to deal with senior doctors retiring from the NHS early.
In response to the Shadow Treasury chief secretary’s comments, Oliver Dowden, chancellor of the Duchy of Lancaster, sprang to the defence of the measures saying they promoted the basic, decent principles of those who work hard to accumulate their pension savings.
