Pension loophole for significant tax savings
Another complex rule, known as the “annual money purchase allowance”, will also change. This limits the amount you can contribute to your pension tax-free each year if you have already withdrawn money from your superannuation fund.
It has been accused of discouraging early retirees from returning to work by making it harder to save. The limit will rise from £4,000 to £10.00 from 6 April.
That could widen a tax loophole for early retirees tempted to return to work, experts suggest.
The ‘MPAA’ rule was introduced to prevent people from diverting their income through pensions in order to benefit twice from tax relief on contributions. But his low level meant that some workers were unexpectedly drawn into his net.
Tom Selby, of pensions firm AJ Bell, said: “It has been set at such a low level that it was in danger of catching some fairly modest earners unawares.”
For example, someone earning £50,000 and automatically saving 10% of their salary, including employer contribution, would be in breach of the old £4,000 limit.
Mr Selby warned those taking advantage of the loophole to be aware that the allowance takes into account tax relief and any employer contributions.
This means that a basic rate taxpayer whose employer does not pay their pension could save £8,000 a year before topping up the allowance. A higher rate payer could save £6,000. The allowance only applies to defined contribution pension schemes.
Rebecca O’Connor at pensions firm PensionBee said the change made it more likely that people would recycle their pension money, but that the benefits outweighed the risk.
“That’s why there needs to be some kind of allowance – £10,000 isn’t huge though, and the benefits for people who really want to top up their pensions at this point in their lives should, in theory, outweigh the risk of the opportunity recycling is being exploited,” he added.
Technology funding renewal
Meanwhile, plans to reform pension systems to boost investment in high-growth technology companies, originally announced by Kwasi Kwarteng, have fallen into the long grass.
The £250m Long-Term Investment for Technology and Science initiative, known as LIFTS, an effort to encourage pension funds to invest in cutting-edge businesses, opened for feedback alongside the Budget.
However, final proposals from the scheme will not now be announced before November as the project has been postponed.
The plan, which was first announced by Mr Kwarteng as part of Liz Truss’s short-lived “Growth Plan” last September, aims to create new types of investment that can boost high-tech sectors with funding from savers’ pension pots .
British pension funds are currently not invested in fast-growing sectors and venture capital, unlike rivals in Canada and Australia.
Canadian pension fund giants like the Ontario Teachers’ Pension Plan Board have built venture capital with billions of dollars under management, backing startups and clean energy projects around the world.
This means British savers may miss out on more attractive pension savings rates, while start-ups lose out on a potential source of funding.
The initiative is soliciting ideas for private sector funding programs that could mirror some of this success.
Mr Kwarteng and Ms Truss originally planned to launch the call for proposals last year, with the funds rolling out “as soon as possible” in 2023. Now, the successful schemes will not be announced until November.
In a request for feedback published alongside the Budget, the Treasury proposed schemes such as the government co-investing in start-ups or acting as a cornerstone investor in new pension funds.
Mr Hunt said he would “come back to the autumn statement” with more details.
Meanwhile, it was also revealed that the government will soon publish a white paper on disability benefit reform, in what has been described as “the biggest change to our welfare system for a decade”.
Under plans still being drawn up, the government will decouple entitlement to benefits from people’s ability to work and introduce a new voluntary employment scheme for 50,000 disabled people a year.
But claiming out-of-work benefits could also become more difficult, with reforms that could widen penalties for those who don’t look for work or refuse a “reasonable offer of work”, as well as imposing stricter requirements on parents. work or put in more hours.
Sarah Coles, of estate agents Hargreaves Lansdown, said the potential reforms represented a carrot and stick approach.
“For those who rely on benefits to get by, it’s not going to make life any easier,” he said. “While tighter benefits policies may force more people to work longer hours, the question is whether this will be a particularly enthusiastic, engaged and productive workforce.”
Freeze the allowance
While retirement savers benefited, other savings allowances remain frozen even as inflation and tax increases erode bank deposits.
The maximum a person can save in an Individual Savings Account (Isa) is set at £20,000, while Junior Isas and Child Trust Funds will also remain capped at £9,000. Any savings interest or dividends earned within an Isa are tax-free.
If the £20,000 threshold had been increased by a year of inflation, it would be worth £22,000 today. If it had been upgraded every year since it was introduced, then savers could have saved £24,560 tax-free.
Jason Hollands of brokerage Bestinvest said savers faced a “Viking-like raid on dividend and capital gains exemptions”. The former is reduced from £2,000 to £1,000 in April and the latter from £12,300 to £6,000.
The Chancellor has also frozen the £450,000 limit on the value of a first home bought with a Lifetime Isa. The Lisas give a 25% government bonus to those saving for their first home or retirement.