With uncertainty everywhere, the nights drawing in and Christmas cheer hanging in the balance, pensioners and those saving for retirement are at least able to enjoy a bit of good news following recent pension announcements.
State pensioners are set for a 2.5% pay rise next April. At five times the 0.5% which the cost of goods and services (inflation) is going up, it’s a meaningful increase in pensioners’ spending power.
The boost is due to the ‘triple lock’ rule which means the State Pension rises every year by the increase in earnings, inflation or 2.5%, whichever is higher.
Under the increase from next April, a single pensioner currently on the new full payment of £175.20 would get an extra £4.40 per week. An older single pensioner on the old basic State Pension of £134.25 would get an extra £3.35 per week.
However the bumper pay rise has added weight to calls to scrap the triple lock as unfair when inflation is so low and workers wages fell by 1% this year.
There was a modest bump up for those still in the pension saving stage too. The pensions lifetime allowance is set to increase by 0.5% next April, in line with inflation.
This means the amount a saver can tuck away into their pension with the benefit of tax relief - and without incurring a hefty penalty of up to 55% - will rise by £5,800 to £1,078,900.
If they save the maximum into their nest egg, most savers will be entitled to an extra £1,450 tax-free cash as a result.
While pension savings of over £1 million is a brilliant achievement, bear in mind that according to the Money Advice Service annuity calculator it would buy a healthy 65-year-old an annuity paying less than £28,000 a year – below the average UK wage.
Simpler annual statements
More good news for pension savers, the government has announced plans to make standardised, simpler annual statements mandatory for all pension providers.
To help savers understand their pensions better, see how far off they are from their retirement goals, and make the most of the tax advantages of pension saving, these often confusing statements are being cut to just two easy to read pages.
In 2019 PensionBee became the first pension provider to adopt Simpler Annual Statements, providing customers with a short and clear overview of their pension, and in 2020 became the first provider to display charges in pounds and pence.
Worry for self-employed
A more worrying development is happening among the self-employed; 3.5 million are not saving in a private pension, new research suggests.
Twenty years ago 48% of the self-employed saved into a pension. Now it’s just 16%, even as their numbers have increased to 15% of the workforce. With COVID-19 hitting self-employed incomes hard their pension provision could get worse. But there are options.
Low-cost self-invested personal pensions (SIPPs) offer an easy way to save what you can when you can, with contributions automatically benefitting from basic-rate tax relief up front. Higher rate taxpayers can claim extra tax relief from HMRC.
For those aged 18 to 39 there is also the Lifetime ISA. You can save up to £4,000 a year and the government adds 25% – equal to basic-rate pension tax relief – up to £1,000. The money is yours tax-free from age 60 or earlier for a deposit for a first home. Other early withdrawals face a charge of 20% for 2020/21 and 25% for 2021/22.
In these tough times it’s important to see the positives like rising State Pension incomes, while recognising you may need to adapt to get the retirement you want, especially if you’re not paying into a pension already.