In response to the Chancellor’s announcement in the Spring Statement, that he will:
- Abolish the Lifetime Allowance from 2024 (removing the charge from 2023)
- Increase the Annual Allowance from £40,000 to £60,000, April 2023
- Increase the Money Purchase Annual Allowance from £4,000 to £10,000, April 2023
- Introduce 30 hours of free childcare for 1 and 2-year olds (currently applies to 3 and 4 year olds), as well as wraparound childcare for primary school children
- Introduce back to work programmes for the over 50s
Becky O’Connor, Director of Public Affairs at PensionBee, a leading online pension provider, commented: “It looks like the Chancellor has reached for the biggest carrot he could find when it comes to keeping experienced workers in the workplace, by scrapping the Lifetime Allowance.
The abolition of the Lifetime Allowance (LTA) is a huge and unexpected move. For many, this will turn pensions from a complex planning nightmare into something that they can have confidence in. Removing it completely makes pensions simpler at a stroke.
On the face of it, scrapping the deterrent of the LTA appears to only benefit wealthier, older pension savers. Indeed 95% of workers are currently unaffected by the LTA. However, over time, many young workers could potentially have hit the previous Lifetime Allowance as they approached retirement age, so removing it could benefit many more people who are diligently saving into their pensions, further down the line.
The Annual Allowance is now set to rise from £40,000 to £60,000 with effect from April 2023, with a carve out for public service pension schemes.
The Annual Allowance is the amount you can contribute to a pension annually, tax-free and includes employer contributions. Most workers do not manage to put away even close to £40,000 a year, so a rise to £60,000 won’t mean much for the vast majority. But for people, especially those closer to retirement and looking to boost their pensions as much as possible before they give up work, this is a helpful increase.
Meanwhile, the Money Purchase Annual Allowance is set to rise from £4,000 to £10,000 this year. This is the limit on what you can contribute once you’ve already started to take an income from your pension.
Increasing the Money Purchase Annual Allowance is great for ‘yo-yo’ retirees, who have to dip into their pension pot for a time, but then want to boost it again before they properly retire.”
Help with childcare costs: extending 30 hours support to one and two year-olds (currently applies to three and four-year olds) and wraparound care for school-aged children
“This will make a huge difference to parents’ ability to stay in work. Previously, there was a significant gap of two to two and a half years between when a parent would have to go back to work after parental leave and when help with childcare costs would kick in. Closing this gap means that mothers and fathers who want or need to keep working will be better able to afford it.
The relative shortness of the school day has also been a bind on parents’ careers and the funding for wraparound care is welcome for parents who want to work more, too.
Not only will staying in work boost mothers’ career prospects - because it is usually mothers who take time out - it should also help reduce the gender pay gap and the gender pension gap.
Staying in work for those two years could boost the eventual private pension pot of a parent on an average salary by around £12,000 (£205,000 rather than £193,000). With the impact of better salary progression factored in, this boost could be even greater.”
The introduction of back to work programmes for the over 50s:
“Older workers often feel like they can’t find the right kind of jobs for them. Many would prefer more flexible and part-time work. So a concerted effort to match older workers who want to work with roles that are suitable is also welcome news. Returner programmes for parents have been successful in the past.”
Useful statistics (PensionBee research):
- The average pension pot of a 65-year old is £87,500
- Overall average pension pot size, all ages, is £21,164
- The average annual pension contribution by a PensionBee customer is £2,201 a year