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During the recent budget announcement, it was declared the pension lifetime allowance of £1,073,100.00 will be frozen for the next five years covering tax year 2025/26.  The pension lifetime allowance is the amount saved, tax efficiently, into a pension throughout a person’s lifetime.  Usually, the allowance is increased in line with Consumer Price Index (CPI).  Therefore, if you allow 2% increase from the CPI annually, pension savers could miss out by around £94,000 by the end of five years.

There were no changes announced to the annual pension allowance of £40,000.00, tax free cash limits of 25% or the levels of tax relief applicable on personal contributions.

There are two types of ways to contribute to a pension – ‘relief at source’ and ‘net pay arrangement’.  Relief at source means your pension contributions are taken from your net pay and ‘grossed up’ for example, if you were to contribute £5,000.00 you would only need to pay £4,000.00 and the relief would provide the extra £1,000.00.  The minimum annual income for this type of arrangement is £3,600.00.  With the net pay arrangement, your contribution is made from your ‘pre-tax’ or ‘gross’ salary and you will pay income tax on the remaining balance.

For low earners who are not able to take advantage of 20% grossed up contributions, from tax year beginning April 2024, a top-up payment will be paid directly into the pension scheme on behalf of the individual, although these payments will not be able to be claimed until 2025/26 (but will be backdated).  These top-ups will help to better align lower and higher paid workers, with equivalent savings being paid into pension schemes using relief at source.  An estimated 1.2 million individuals could benefit by an average of £53 a year.  Taking into account the potential growth on pensions, this could equate to quite a large sum.

The government introduced a ‘triple lock’ to the UK state pension in 2010, with the intention of guaranteeing that the pension would increase in line with living costs and would not lose out in real terms.  The triple lock is a three-fold guarantee and means pensions will rise in line with either the average earning, the Consumer Prices Index (CPI) or 2.5%, whichever is greater and should mean the pension will beat inflation.

The triple lock has become costly for the government and the taxpayer, and the government are seeking reform.  In April 2022, a temporary change to a ‘double lock’ will take effect using either the higher of CPI or 2.5%.  This is to avoid an increase of around 8%, which comes from an increase in average earnings, due to people returning to work and moving away from furlough pay after the pandemic.

If you would like to protect your lifestyle in retirement and consider paying extra into your personal or workplace pension, we have a team of Independent Financial Advisers who can advise you.  Based in our Dalston, Dumfries, Penrith and Workington offices they are always happy to help.