The Chancellor, Philip Hammond, today declined to make substantial changes to pensions in his Autumn Budget. Most significantly, he avoided tinkering with the tax relief system, contrary to widespread speculation that he would in advance of his speech.
Here, Which? Money expert Gareth Shaw explains the pension changes.
Increases to the state pension
The Chancellor did confirm that the weekly state pension will rise by 3% in April 2018 to £125.95 if you receive the basic state pension. People covered under the new state pension will see the full level of new state pension increase from £159.55 per week to £164.35 a week.
Annual increases in the state pension are covered by the so-called ‘triple lock guarantee’, which ensures that it rises each year by either September’s Consumer Prices Index (CPI) inflation figure, average wage growth or 2.5% – whichever is highest. In this case, the inflation rate of 3% in September 2017 dictated how much the pension would rise by.
- Find out more: How much state pension will I get?
The lifetime allowance for pension savings is increasing in line with CPI, rising to £1,030,000 for 2018/19.
The lifetime allowance, which currently stands at £1 million, is the total value of pension benefits you can receive in your lifetime without having to pay a tax charge.
In 2017/18 the lifetime allowance was held at £1m after previously falling from £1.5m and £1.25m.
There was no change in the annual allowance, despite speculation that it might be reduced to £35,000.
The government spends billions of pounds every year on tax relief (see pension tax relief, below) and places a cap on the amount you can save every year, upon which you can earn relief. This cap is known as the ‘annual allowance’.
The annual pensions allowance for the 2017/18 tax year is £40,000 and it will remain the same for 2018/19. This has reduced significantly over the years.
- Find out more: How the pensions annual allowance works
Pension tax relief
Changes to the pension tax relief system have been mooted for several years. However, the chancellor has now declined to make changes in either of his 2017 Budgets.
Pension tax relief is an incentive offered by the government to encourage people to save into a pension. If you belong to a workplace pension scheme, your pension contribution is usually taken from your total (gross) pay, before any tax is deducted.
For those with private pensions, basic rate tax relief is administered by providers and effectively tops up contributions, with higher rate taxpayers having to claim their additional
Tax relief means that you pay tax on less income than you otherwise would – so a £100 pension contribution only costs basic-rate taxpayers £80. Higher rate taxpayers would only pay in £60 for the same contribution.
- Find out more: Tax relief on pension contributions explained
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