Boosting the economy by getting the over 50s back to work is likely to be high on the agenda of the forthcoming Budget, says Andrew Tully, technical director at Canada Life.
But encouraging people out of retirement or supporting them back to work from long-term sickness is not going to be easy, as he says: “This is a complicated area and there will be no ‘one size fits all’ approach, with the Chancellor treading a fine line to avoid alienating any one cohort of society.”
There are also many pensions issues to address, Tully says, including the money purchase annual allowance (MPAA), which restricts how much people can save into their defined-contribution (DC) pension once they’ve accessed it.
“Penalising people who either return to the workforce or attempt to replenish savings, having used the pension freedoms as they were designed feels wrong,” he added.
While this may be perceived as a problem for high earners, Tully clarifies that this is not so: “Our figures show that someone who has flexibly accessed their pension, earns just over £33,000 and, together with their employer, contributes 12% to their pension, will be caught by this tax charge.”
In the dark
But many people don’t even know that this tax charge exists. According to recent Canada Life research, three in five over 55s (62%) with a DC pension have never heard of the MPAA. Not many (4%) say they know exactly what it is and how it works, yet a quarter (27%) of over 55s with a DC pension have accessed it since 2015. Canada Life estimates between 500,000 and 1 million people are now affected by the MPAA restrictions.
The age at which people can retire should be high on the agenda too, says Tully.
“We must hear by May at the very latest what the government plans to do about future rises in state pension age, “he said. “Rumours suggest plans to increase it to age 68 will be brought forward, potentially to the 2030s, and this will affect many people.
“DWP needs to learn lessons from the past and ensure that anyone within this age bracket is told they will have to wait an extra year to claim their state pension. Potentially hundreds of thousands of retirement plans will need to be rejigged. Many people will face a challenge to bridge the gap between when they want to retire and when the state pension starts. And for many, the state pension won’t provide a desirable standard of living in retirement, so other savings will be required.”
Changes could throw retirement plans into disarray
Looking at the other end of the retirement spectrum, Tully suggests that the minimum pension age (currently age 55 and moving to 57 from 2028) should be on the agenda too.
Tully said: “If the government retains the 10-year link to state pension age, then it will rapidly move to age 58 − a three-year hike in a very short time frame, which could throw retirement plans into disarray. People may need to adapt plans or use non-pension assets to tide them over.”
He also believes that this Budget could also be a good opportunity to review the future of the state pension triple lock: “Any changes would be hugely controversial. But it’s worth remembering that the state pensions of today’s retirees are paid for from the tax receipts of today’s workers, so there should be a sensible debate around the intergenerational fairness and affordability of the state pension in its current format.
“Every 1% increase in the state pension costs the taxpayer £900m ($1.1bn, €1bn), each year. That’s a hugely expensive state benefit today but even more so in the future, as the ratio of workers to retirees is forecast to change. By 2045 the number of people of pensionable age will grow to 15.2 million, an increase of 28% on the 2020 number. There is a tricky balancing act for the government as it looks at the medium and long-term sustainability of this policy.”
Millions out in the cold
The current economic and political environment is not fertile ground for tax increases, observes Tully.
He said: “Many income-tax allowances are already frozen through to 2028, which will mean many people paying significantly higher income tax.
“Any further freezing of tax thresholds will leave millions out in the cold. Further increases to personal taxes by stealth will be deeply unpopular with an electorate struggling to balance household budgets.
“With an election around 18 months away, the chancellor may want to consider the impact these are having on many voters in advance of the next general election.”
Bad news for investors
We also need to bear in mind that changes to capital gains tax (CGT) and dividend allowance are looming, says Tully.
He added: “We shouldn’t forget that the autumn statement introduced changes to dividend and CGT from April 2023, with more following in April 2024. The dividend allowance will be substantially cut over the next two tax years, reducing from £2,000 to £1,000 from April 2023 and then dropping further to £500 in tax year 2024/25.
“An individual’s CGT exemption will fall from the current £12,300 to £6,000 from April 2023 and then to £3,000 from tax year 2024/25. Trusts will continue to get half of the individual exemption.
“Taken together these are bad news for the average investor holding money in unwrapped portfolios outside ISAs and pensions. But many other clients will be hit, including those with taxable portfolios who undertake automated rebalancing, trustees with unwrapped portfolios within their trusts, buy-to-let investors, and those who use general investment accounts to fund ISAs on an annual basis.
“Non-income producing assets such as investment bonds could be an appropriate home for many people with money to invest, alongside the continuing benefits of pensions and ISAs.”
