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On Wednesday, Jeremy Hunt delivered one of the most crucial budgets in recent times. During a period of high inflation, a cost of living crisis and uncertainty in the markets, the Chancellor’s statement was highly anticipated.
In his opening statement, the Chancellor brought good news for the economy, confirming that the UK will avoid falling into a recession this year and what’s more, the Office for Budget Responsibility (OBR) forecasts suggesting inflation will be less than 3% by the end of the year.
In the budget, a number of key measures have been taken to try to keep inflation under control. These include the Energy Price Guarantee (EPG) which will now be extended for a further three months from April 2023, and a steady, gradual increase in interest rates by the Bank of England (BoE). The OBR now shows a forecast that has Consumer Price Index (CPI) inflation at 2.9% by the end of 2023.
In addition, the government has committed to try to avoid energy shocks like the country has experienced in the last 12 months and is launching Great British Nuclear to support new nuclear builds and carbon capture.
What does the budget mean for savings and retirement?
In a bid to get more workers back into the workforce, Jeremy Hunt announced some of the biggest changes to pension policy in the last decade:
The Lifetime Allowance (LTA) will be completely abolished from 2024. The LTA was first introduced in the 2006-07 tax year and has been frozen at its current level of £1.073m since 2016. The removal of the LTA itself will not happen immediately and will come in a future Finance Bill. However, the Lifetime Allowance charge will be removed from April 2023. Crucially, the limit on tax free cash (TFC) that can be taken will be frozen at its current level of £268,275.
David Stevens, Retirement Director at LV=, said:
“Scrapping the lifetime allowance (LTA) and increasing the annual allowance will be welcomed by pension savers throughout the UK.
The freeze to CPI rises in the lifetime allowance (LTA) from April 2021 had disappointed many savers and many people will be celebrating the Government’s announcement to scrap the LTA. It penalised good investment decisions and removing it will simplify a complex pensions tax system.
The increase to the annual allowance (AA) to £60,000 is also the first since April 2010, but it is still significantly lower than its previous highest amount of £255,000 12 years ago.”
The Pension Annual Allowance will see a 50% uplift from its current level of £40,000 to a new level of £60,000. This will allow both younger savers and those approaching retirement with the opportunity to increase both regular and annual pension contributions. The combined initiative of the LTA and Annual Allowance has been made in an attempt by the Chancellor to get over 50s back into work, especially those who have retired early for fear of the LTA charge taking effect.
The industry has welcomed the news that the Money Purchase Annual Allowance (MPAA) has been increased back to its original figure of £10,000 from £4,000. The measure was originally introduced to stop retirees recycling funds back into their pension, but the reduction was not supported by the industry and as such a return to £10,000 is welcomed all-around as a balanced compromise.
There was lots of discussion before the budget as to whether the Chancellor would press ahead with the planned increase to Corporation Tax from 19% to 25%, which the Chancellor confirmed in his speech. The announcement of the planned increase has not been popular and therefore there was debate as to whether the party would press ahead. Notably, however, even at 25%, the UK still has the lowest corporation tax rate in the G7.
The government is optimistic that the announced changes will have a positive impact on the economy and, along with other measures such as child support, will help get people back into work. The OBR believes that this will result in approximately 110,000 more individuals in the workforce by the end of the forecast period.
The savings and retirement industry has a lot to do over the coming weeks as it prepares for the increase to the annual allowance in pensions and upcoming changes to the lifetime allowance.
While there are still challenges ahead, this budget will deliver immediately for savers both in accumulation and decumulation.