The Spring Budget is a confusing beast. Every year, my Mirror colleagues and I receive zillions of your questions about all aspects of the Chancellor’s plans. Often it takes us a while to figure out all of the implications too.
This year, however, there’s been an almost unanimous scratching of heads across the nation over some of the big announcements – and the pension changes seem to have caused the most confusion.
I’m going to do my best to explain what the new rules mean. But let’s face it, pensions are a strange and scary land for most people. So I’ll also take a look at the three main types of pensions and what they mean for you.
What’s been announced in the budget?
When you save in to a pension, there is a tax-free limit known as the ‘lifetime allowance’ This is the maximum amount of money you can save without having to pay tax and is currently £1,073,100. This isn’t per pension – it applies to all personal and workplace pensions, though not the state pension, which is a separate thing.
Jeremy Hunt has now got rid of the tax-free limit completely, instead of capping it at a higher level as we expected him to. This means that you can now save a lot more in a pension tax-free if you have a lucrative enough job – but only from 06 April 2023. The theory behind this is to lure professionals who have retired or semi-retired back in to industries where we have shortages of them, like doctors, for example. In addition, some people approaching retirement with ‘final salary’ [defined benefit] pensions could also find themselves reaching the old limit.
But there’s a few big ‘say what’ moments for the rest of us. For starters, if you’re in work right now chances are you won’t be anywhere near that sum in your pension – now or ever. And secondly, most of the experts I’ve spoken to have stated that they don’t believe the new proposals will attract people back to work. The main blockers there are long working hours, conditions and frustration with working practices and bureaucracy. In short, it’s not the cash, it’s the system.
For relatively high earners now, the limit that you can pay in to your pension tax-free in a single tax year has also increase from £40,000 to £60,000. And the Money Purchase Annual Allowance (MPAA) has also changed. This applies when you take money out of your pension at 55 or over. The MPAA cuts how much you can then pay back in. This has been increased to £10,000. This matters because according to Royal London, almost a third of pension advisers reported that people were accessing their pension earlier than planned due to difficult economic conditions.
If you’re reading all that and thinking, ‘what the hell does that mean for me?’ then I fully sympathise. It’s easy to give up and think that your retirement looks bleak or impossible when reading the news. But don’t let it get to you. Here’s my guide to your pensions and how they can benefit you in the world the vast majority of us live in.
Pensions in plain English
There are three main types of pension:
- The state pension. This is the pension you get from the state (or Government) and is drawn from your National Insurance contributions over your lifetime.
- Your workplace pension. This is the pension you have through your workplace. You can usually contribute extra into it and the pension provider should send you a statement every year showing you how it’s doing – even after you’ve left the business.
- A private pension. These are pensions you set up yourself. They often come with tax benefits and are a really useful way to save for retirement – especially if you are self-employed.
There are loads of different types of private pensions, which is why taking advice before signing up to one is a must. Before you fork out cash though, have a look at the free options on the invaluable, free and impartial Money Helper website.
Workplace pensions also vary but generally fall in to two types:
- Defined benefit schemes. Formerly known as final salary or career average pensions. Final salary pensions pay out what you’re on at the point you leave or retire Career average pays out on… your average wage over you’re your career.
- Defined contribution schemes. Formerly known as money purchase pensions. You can get these through your workplace or privately. The amount you get depends on what you pay in, additional contributions, how long you pay in and performance and charges of the pension.
Needless to say, defined benefit schemes are traditionally the more lucrative option as your earning power increases as you work. That’s why workers fight so hard to keep them.
When can I retire and how much will I get?
Due to lots of complicated wrangling over the years, the retirement age for most of us is changing and is likely to keep changing.
The age when you get your state pension is currently 66 – but that’s going up to 67 for those born on or after 05 April 1960 and again to 68 between 2044 and 2046 for those born on or after April 1977. Let’s be frank, for most of us we will be working towards a later retirement date I the future too. There’s a full retirement date pension scale here.
So it makes sense to have alternative plans for your retirement. This can be a confusing and intimidating process. Many of the people I speak to are in total denial about their retirement income. Taking a cold hard look at your current pension pots can induce a bit of panic. But it’s better to face down your finances rather than wait till it’s too late.
Pensions aren’t the only option on the table though. You might want to consider savings and investments to meet your retirement needs. This is certainly an option for younger people who can’t get on to the housing ladder but have saved some cash for a deposit.
It makes sense to speak to a financial adviser if you don’t know how to get started. They will charge you a fee, but it’s worth it to help you navigate the rather complex world of future savings. Why not speak to a friend or family member and ask them if they have any recommendations? Make sure you ask about costs and commission – and what you’re getting for your money.
If you’ve had a few jobs, you could have lots of pensions
Most people these days don’t have a job for life. That means that there are likely to be lots of ‘bits of pensions lurking in various workplace schemes, just waiting to be reclaimed. The Pension Tracing Service is a completely free service that can help you track down a missing workplace pension. It’s a great organisations that can help you track down your pensions if you are struggling to find old schemes you’ve paid in to. The Pension Tracing Service can help you by trawling through 320,000 pension schemes. It’s dead easy, so get started here right now.
It’s estimated that just under £20 billion is lying around in ‘lost’ pensions, waiting to be claimed. However, wherever there’s easy money waiting to be claimed, there are businesses that will charge you for doing something you can do yourself for free. Pension cold calling is banned and be wary of firms that charge fees to track your missing money.
Keeping on top of your current pension
Both private and workplace pensions should send you an annual statement showing how the pension is doing. These documents might not always make much sense but don’t pop them in the bill drawer and forget about them. Ask questions from the pension provider and get them to put things into plain English for you. They’re taking fees for managing your investment – so make them earn their money.
Your HR department at work should be able to tell you what you’re entitled to pay in to your pension on top of your extra contributions – and what the tax implications are. Book an appointment with them, particularly if you’re over thirty and are thinking long-term.
There are loads of ‘sliding scale’ guides showing what you should be paying into your pension if you want various incomes at retirement. These can be really scary to the casual observer. But don’t forget that it’s never too late to save more into a pension, and you can get tax breaks too, or even save money on commission by moving providers in some instances.
Once again, the free Money Helper website (formally the Pensions Advisory Service) has tons of useful information on all things pension on their website in straightforward terms. I think it’s a fantastic place to start if you want to learn more about pensions and savings.
A few years back, the Government ‘liberalised’ the pension rules, which suddenly meant you could withdraw most of your pension pot when you hit 55 (expect this age to rise to 57 in 2028) You can take out 25% of your pension tax free, though if you want to go for it
As for the remaining 75%, you’ve got a few options:
- You can take some or all of it out as cash – but the tax bill can be huge.
- You can buy an annuity – a regular payment that pays you an income for life.
- There are also other investment opportunities too.
Which brings me to scams. With people suddenly able to get large sums of money overnight, fraudsters stepped into the mix. The advice here is really simple. Businesses are banned from cold calling you about pensions. So if this happens hang up – it’s likely to be dodgy.
The scams work by pressuring you in to either transfer your pension to another fund (which charges commission but doesn’t necessarily benefit you) or by getting you to invest in fake or rubbish ‘get rich quick’ schemes. I can’t make this any clearer – don’t do it! Don’t even invest a pound with someone who cold calls you.
Featured in Mirror – Martyn James