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Budget: Pensions to get boost as tax-free limit to rise Budget: Pensions to get boost as tax-free limit to rise
(32 minutes later)
The total amount that workers can accumulate in their pension savings before paying extra tax is expected to be increased in Wednesday's Budget.The total amount that workers can accumulate in their pension savings before paying extra tax is expected to be increased in Wednesday's Budget.
The final figure has not been confirmed, but people are expected to be able to save up to £1.8m over a lifetime, up from £1.07m currently.The final figure has not been confirmed, but people are expected to be able to save up to £1.8m over a lifetime, up from £1.07m currently.
The policy aims to stop people - particularly doctors - from reducing hours or retiring early owing to tax.The policy aims to stop people - particularly doctors - from reducing hours or retiring early owing to tax.
Critics say the move will only benefit a small fraction of the workforce.Critics say the move will only benefit a small fraction of the workforce.
The chancellor could also increase the £40,000 annual cap on tax-free contributions to pensions, to £60,000. UK economic growth has flatlined in recent months and the Bank of England expects the UK to enter a recession this year. About a quarter of people of working-age - around 10 million people - don't have jobs. Persuading workers to work for longer is part of UK plans to boost growth with chancellor Jeremy Hunt's Wednesday announcement on tax and spending being dubbed the "Back to work Budget".
Persuading workers to work for longer is part of UK plans to boost growth with chancellor Jeremy Hunt's Wednesday announcement on tax and spending being dubbed the "Back to work Budget".
However, consultancy LCP told the BBC the government's plans to raise pension tax allowances will benefit relatively few workers.However, consultancy LCP told the BBC the government's plans to raise pension tax allowances will benefit relatively few workers.
The number of people who have already breached the lifetime limit on pensions before paying tax and those who risk breaching it is 1.3 million, less than 4% per cent of the UK's current workforce, it says.The number of people who have already breached the lifetime limit on pensions before paying tax and those who risk breaching it is 1.3 million, less than 4% per cent of the UK's current workforce, it says.
Beneficiaries will include those who have worked in the public sector for many years. There has been a particular focus on doctors and consultants - some of whom have retired early or reduced hours for pension tax reasons as the NHS has become increasingly stretched.Beneficiaries will include those who have worked in the public sector for many years. There has been a particular focus on doctors and consultants - some of whom have retired early or reduced hours for pension tax reasons as the NHS has become increasingly stretched.
UK economic growth has flatlined in recent months and the Bank of England expects the UK to enter a recession this year. One of the main issues raised has been whether enough people who can work, are working. Dean Butler from insurance firm Standard Life said middle earners had increasingly been affected by the cap.
Many industries have struggled to recruit workers, though job vacancies are falling. Earlier this year, Mr Hunt pledged to consider changes to encourage the over-50s who had taken early retirement during or after Covid to return to work, saying he "would look at the conditions necessary to make work worth your while". Any increase in the annual allowance, he said, would be of specific help to those with irregular earnings who were relying on making larger pension contributions later in their careers.
Not everyone believes that boosting pension allowances is the best policy to meet these ends for the wider working population. In the medical profession some doctors and consultants have reduced their hours or retired early from the NHS because they were in danger of breaching the tax-free pensions lifetime allowance, and they calculated that continuing to work was counterproductive for their finances.
"Increasing them will reduce the damage they do, but even better would be a more thorough reform of how pensions are taxed," said Carl Emmerson, from the Institute for Fiscal Studies, a leading independent think tank. The annual allowance tax-free pension allowance - which is also expected to increase from £40,000 to £60,000 each year - has been subject to much of the same debate.
"High earners with big pension pots do benefit from inappropriately generous tax treatment of pensions, but there are much better ways of restricting this than these crude limits." When is the Budget and what could it mean for my money?
What are pension allowances?
The so-called lifetime allowance is the total amount of money you can build up in a workplace defined benefit pension scheme and savings in a defined contribution pension before you face a further tax charge. The tax is levied on the excess over the allowance. The state pension is not included in the calculation.
Who are the millions of Britons not working?Who are the millions of Britons not working?
Why the chancellor wants this Budget to be boringWhy the chancellor wants this Budget to be boring
When is the Budget and what could it mean for my money? Many industries are struggling to recruit workers, though job vacancies are falling. Earlier this year, Mr Hunt pledged to consider changes to encourage the over-50s who had taken early retirement during or after Covid to return to work, saying he "would look at the conditions necessary to make work worth your while".
The charge comes at certain times, such as when you start to draw a defined benefit pension. The allowance had been scheduled to remain at £1.07m until 2025-26. Not everyone believes that boosting pension allowances is the best policy to meet this goal.
In the medical profession some doctors and consultants have reduced their hours or retired early from the NHS because they were in danger of breaching the allowance. They calculated that continuing to work was counterproductive for their finances. "High earners with big pension pots do benefit from inappropriately generous tax treatment of pensions, but there are much better ways of restricting this than these crude limits." said Carl Emmerson, from the Institute for Fiscal Studies, a leading independent think tank.
The British Medical Association has called the current lifetime allowance "punitive". Mr Hunt is also expected to detail other measures to increase the workforce including:
The annual allowance is the amount you can build up each year, before facing a tax charge, and has been subject to much of the same debate. Parents on universal credit to receive childcare funding upfront, instead of having to claim it back.
Types of pension explained An increase in the UK-wide £646-a-month per child cap on support for universal credit claimants
A defined contribution pension is when you build up a pot of pension savings which is invested. On retirement, you have various options. Fitness-to-work tests for those with medical conditions.
One of those is to buy an annuity with all, or part, of that pot. Another option is to "drawdown" some of that pension while leaving the rest invested, known as flexible access. Raising the amount that someone over 55 who has already accessed their private pension can put in to £10,000 a year from £4,000
A defined benefit pension is a bit different. It sees the amount you receive in retirement depend on how long you have been in the scheme and your salary during that time. What are pension allowances?
A third change could also be made, again to encourage people to get back to work. The so-called lifetime allowance is the total amount of money you can build up in a workplace defined benefit pension scheme and savings in a defined contribution pension before you face a further tax charge. The tax is levied on the excess over the allowance. The state pension is not included in the calculation.
Under current rules, somebody who has already accessed their private pension after the age of 55 can subsequently only put £4,000 a year into their pension pot a year before facing an additional tax change. This is known as the money purchase annual allowance.
Again, the suggestion is that this is a disincentive to return to work, and the allowance could rise to its original level of £10,000.
Pensions providers have welcomed the expected change in the rules.
Dean Butler, at Standard Life, said: "The lifetime allowance has become unfit for purpose in recent years and has increasingly caught middle earners who have saved diligently over the years."
Any increase in the annual allowance, he said, would be of specific help to those with irregular earnings who were relying on making larger pension contributions later in their careers.
Tom Selby, head of retirement policy at AJ Bell, said: "The constant salami slicing of pensions allowances we have seen in recent years have not only reduced retirement savings incentives for Brits directly - they have also created unwieldy complexity which makes explaining the benefits of pension saving unnecessarily difficult."
Anyone drawing their pension is still liable to income tax as normal.Anyone drawing their pension is still liable to income tax as normal.
Debate over working numbers
The number of people not working has a broader effect.
A smaller workforce means less tax to pay for services like the NHS, and greater spending on benefits.
Since people on benefits generally have less money to spend than those in work, it also means less spending on the High Street.
That in turn is bad for businesses and how many people they want to employ.
In turn, that can affect how many jobs are available for those who are job hunting.
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