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Pensions and pension savers have come under pressure from a variety of factors in recent years. Those saving for retirement must now consider challenges ranging from the cost of living to the value of the state pension, and from the lifetime allowance to changes in the retirement age as they plan for life after employment. Here, we take a look at some of the issues savers are facing and consider some strategies for mitigating them.
The cost of living
Those already claiming the state pension are expected to find meeting the cost of living a challenge this year. This is because the government dropped its triple lock promise for pensions, even though inflation continues to rise.
Under the triple lock policy, the state pension increased every year by whichever is the highest of inflation, earnings growth or 2.5%. However, earnings growth, which was running at 8%, was dropped to create a double lock. The state pension will now increase in April 2022 by 3.1%, which was September’s inflation figure.
However, inflation is now running ahead of this figure, exacerbated by higher energy and food bills, which pushed up the cost of living by 5.1% in the 12 months to November 2021 – the highest rate in ten years. Additionally, the Bank of England has forecast the rate of inflation to rise to 6% in early 2022.
In addition to this, people now must wait longer to access their state pension. The retirement age for the benefit recently changed from 65 to 66, with an increase to 67 due in 2028.
Boosting the state pension
There are a couple of simple actions that savers can take to boost the value of their state pension.
Firstly, fill any gaps in their National Insurance Contributions (NICs). The full state pension is only paid out to those who have at least 35 years of NICs. Those who are falling short of this can boost their state pension by making a one-off payment to HMRC.
Secondly, it is possible to defer the age that the state pension is received. The pension increases by 1% for every five weeks deferred.
Private pension savers are also facing some headaches, not least the fact that the lifetime allowance (LTA) has been frozen at £1,073,100 until April 2026.
The LTA is the maximum figure for tax-relieved savings in a pension fund. Where the value of the scheme is more than this when benefits are drawn, a tax charge can occur. This is of 55% of the excess, if taken as a lump sum, and 25% if taken as a pension.
Although, the allowance of £1,073,100 may seem high to many savers HMRC’s own figures show increasing numbers of people being brought into scope of the charge.
To make tax-efficient decisions as regards any additional investment, it’s important to know if savings will exceed the LTA. If so, alternative investment routes, such as ISAs, or tax-advantaged schemes like the Enterprise Investment Scheme, may be preferable.
Multiple pension pots
As more and more people build up small pension pots through automatic enrolment with different employers, there is a natural desire to consolidate those savings.
Pension providers are aware of this, so we can expect to see more adverts and campaigns to encourage people to consolidate their small pension pots. This will almost certainly lead to increased competition between the providers and could create confusion for those looking to consolidate their pots.
One development that aims to help clarify people’s pension situations will be pensions dashboards. These are a digital service that allow people to keep track of all their pension savings. The roll-out of dashboards is currently scheduled for 2023.
To discuss the best way to plan for retirement and the tax consequences of any decision, please contact us.