AAB Wealth: do the Budget pension tax changes mean that you could be making a worthwhile return to work?
The last time Jeremy Hunt delivered a Budget speech, it was billed as an “emergency”, as the Chancellor tried to fix the problems from his predecessor that had sent markets tumbling.
But springtime brings optimism and this time his outlook was a bit more positive: recession avoided; inflation falling from above 10 per cent to below 3 per cent by the end of the year, and – in his words – the UK economy is “proving the doubters wrong”.
Amid the news on energy bills (support extended), fuel duty (frozen), alcohol duty (going up), there was huge focus on getting people back to work.
Not only has Mr Hunt brought in new measures aimed at helping people return to work, such as increasing free childcare, he’s also trying to coax people into avoiding early retirement.
No more lifetime pensions allowance
As he looked to encourage more over-50s to avoid early retirement, one incentive open to the Chancellor was increasing the amount they can withdraw without a tax penalty – the lifetime allowance.
There was some expectation Hunt would increase the allowance. In fact, he’s scrapped it completely, meaning you can pay in what you like over your career without being taxed on it. The level you can pay in each year also increases, from £40,000 to £60,000.
Alongside this there are changes to the tax-free lump sum. Previously set at 25 per cent of your total pension, this is now limited to £268,275, which is 25 per cent of the previous lifetime allowance limit of £1,073,100.
We at AAB Wealth believe this move makes sense. People are much less likely to buy annuities nowadays.
Can the Chancellor bring retirees back?
It’s not just getting people to stay on in work, the Chancellor also wants to convince those people who have already left to come back.
This has meant tackling the issues standing in people’s way. Money is set aside for healthcare and setting up apprenticeship-style programmes –known as “returnships” – teaching former retirees new skills for alternative roles.
The Treasury believes its measures could mean an extra 15,000 people in the UK workforce by 2028. But will it work?
For some, certainly. In the oil and gas industry, where many of our clients have spent much of their careers, there’s already a long tradition of carrying out some form of consultancy work after an official retirement. Many are already doing this to some extent. However, this tends to happen less if they have been out of the workforce for more than a year or so.
For others, coming back after time out is less likely. Once you’ve had your leaving drinks and goodbye cake, if you’ve already got enough money set aside, then would you really go back?
For many, retirement is a huge transition, and one that can take a while to get used to. Once that new transition has become established, the idea of returning to work can feel like a “backwards” step.
The reality
The removal of the lifetime allowance will be viewed as a very positive step by many people, particularly if they are in the “accumulation” stage of their careers.
With the potential for punitive charges if you’ve saved above the taxable level now gone, planning for your pension has suddenly become a lot less complex.
We think there will be a sliding scale of those who are attracted by this. Some will jump at the chance, others – having already planned to get to this stage – will be less keen to switch direction now.
Whether it’s close at hand or a while away, if you’d like more advice on what the proposals could mean for your retirement, please get in touch with Richard Johnston, chartered financial planner at AAB Wealth.