Pensions are set to have one of the biggest overhauls in recent memory, as the Chancellor also announced a consultation on plans that would bring significant changes to pensions in the UK. The biggest change would be a Lifetime Pension, more colloquially known as a ‘pot for life’ – where someone would choose the pension plan that suits them best, and every employer would then pay into that plan rather than the employee being put into the employer’s scheme.
The obvious benefit is that you are less likely to lose this pension, as it will be the only one that you need to have during your working life. The downside, according to experts, is that it will increase the employers’ costs of providing pensions to employees, as they would need to pay into multiple pensions for different members of their workforce. Paying into a single scheme, which is the current system, is much simpler for employers as they have one block payment to make each month. However, these pensions often get forgotten about by employees as they move from job-to-job.
Triple lock stays, with State Pension up 8.5%
There was concern before the Autumn Statement that the triple lock, which uprates State Pensions each year by the highest of average earnings growth, inflation, or 2.5%, might disappear given the high levels of inflation we have seen in recent months in the UK.
However, Jeremy Hunt chose to keep the triple lock, and the State Pension will be increased by 8.5% from April 6, 2024, meaning someone on the new State Pension will see their weekly income rise from £203.85 to £221.20. Anyone who reached State Pension age before 2016 will see their pension rise from £156.20 to £169.50 per week.
This is one of the largest State Pension increases in cash terms and will go some way to helping pensioners who have been struggling with the cost-of-living crisis.
Tax on pensions passed on after death to be scrapped
The Government has also had a change of heart when it comes to pensions passed on after death. The Chancellor announced that pensions passed to beneficiaries if someone dies before they reach age 75 will not be taxed.
The original plan, announced by HMRC in the summer, was to tax any income taken from a pension pot through drawdown – where an income is taken from the underlying fund over a period of time – or from an annuity, would be taxable. This announcement reverses that decision, and HMRC has now confirmed these payments will continue to be tax free from April 6, 2024.
Under the current rules, a defined contribution pension pot can be transferred to beneficiaries tax-free if the original owner of the pension dies before they reach 75.
The Chancellor also re-confirmed that the Lifetime Allowance – which limited the amount of money you could build up in your pension over your lifetime, including all contributions and investment returns to £1,073,100 – will be removed from April 6, 2024.
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Pensions are complex and whether you are an employer, employee or self-employed, you should know what you can do to maximise your retirement savings. If you would like more information on this, then please get in touch and we will explain what you need to know.