The Autumn Statement and your pension
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
There has been a lot of change in the UK’s political realm since the summer. Three Prime Ministers and two budgets from separate chancellors. It is little wonder that many are confused about their pension and how new policy changes might affect them. In this article, our Grantham financial planners explain some of the key features from the Autumn Statement in November 2022, how the announcements relate to pensions and how these could impact a retirement plan in the coming months. We hope you find this content useful. If you want to discuss your financial plan, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
The 2022 Autumn Statement and the State Pension
Chancellor Hunt’s budget in November included a significant pledge to re-introduce the “triple lock” for the State Pension (in April 2023). This system ensures that State Pension income rises by one of three measures each tax year, but had been suspended in April 2022 to prevent an 8% rise in the State Pension (deemed unaffordable) due to average wage increases. Therefore, the State Pension will rise by 10.1% in April 2023 if inflation continues to run high into the coming months (as is widely expected).
Limited support for the cost of living
Under Liz Truss’s September “Mini Budget”, the government had committed to a £2,500 energy annual price “cap” (for a typical household) over the next two years. Chancellor Hunt’s Autumn Statement, however, reduced this commitment to April 2023, when the “cap” may rise to £3,000. There has been some financial support, recently, to help households cope with increasing utility bills – e.g. £900 for households on means-tested benefits, £300 for pensioner households, and £150 for individuals on disability benefit.
Frozen income tax bands
At present (in 2022-23), an individual can earn up to £12,570 without paying income tax. This threshold has now been frozen until 2028 – along with tax bands for the basic rate (£12,571 to £50,270) and the higher rate (£50,271 to £125,140 from 06/04/23). This freeze could affect those earning a wage, since a rising wage (e.g. an annual pay rise) could push workers into higher tax brackets. Those currently in retirement may be affected if their yearly income is set to rise. For instance, those receiving the State Pension (which goes up each year), a rising annuity (e.g. an inflation-linked product) or a final salary pension with a rising income. Speak to your financial adviser if you are concerned that you may end up paying more income tax in retirement.
Capital gains & dividend income
Chancellor Hunt took many by surprise when he announced a planned (gradual) lowering of the tax-free dividend allowance. In 2022-23, an individual can earn up to £2,000 in dividends per tax year (outside of an ISA) without paying tax. In April 2023, however, this threshold will reduce to £1,000 and then to £500 in April 2024. This new government measure is expected to cost up to 4m taxpayers hundreds of pounds each year – including pensioners who rely on dividends for retirement income. It will also bring more people into self-assessment, increasing the compliance burden for them, as well as an already constrained HMRC.
Investors may also be affected by the planned reduction in the Annual Exempt Amount (for tax-free capital gains tax outside of an ISA). In April 2023, this is expected to go down from £12,300 per year to £6,000 per year. Later, in 2024, this will reduce further to £3,000. With some careful planning, however, it may be possible to avoid a needless tax bill on your dividends and capital gains (discussed below).
Some pension planning options
There is still time to plan ahead with your retirement finances. Indeed, the Christmas break may be ideal if it offers you some “thinking space” during quieter periods. Also, there are still some months ahead before the 2022-23 tax year expires (in April 2023). One idea is to ensure that your ISA allowance has been used to its full potential. Any investments held inside will generate tax-free returns (e.g. from capital gains, interest and dividends). If keeping investments outside could result in a higher dividend tax bill in future tax years, then 2022-23 could offer a unique opportunity to optimise your tax plan with the help of a financial planner.
Those receiving (or due to receive) retirement income from their State Pension are unlikely to see much financial benefit from trying to reduce this income to reduce/avoid an income tax bill. Remember, it is usually in pensioners’ best interests to ensure an optimal State Pension (e.g. building 35 “qualifying years” of National Insurance contributions) because it provides a high level of financial stability and predictability in retirement. Other areas of your finances may be more effective and flexible in helping to address new potential problems with your income tax plan in light of the Autumn Statement.
For instance, a married couple might benefit from varying their strategy for pension withdrawal. After all, income tax is levied on individuals – not households. So, it may be possible for a couple to lower their overall income tax bill on their household by increasing pension withdrawals from one spouse (e.g. someone comfortably within their income tax bracket) and reducing those from the other (e.g. someone nearing the threshold for the higher band). Here, it is important to seek financial advice to ensure that a pension withdrawal strategy is sustainable. Bear in mind that the end goal of a retirement plan is not to minimise taxes (especially if this risks eroding your wealth). Rather, it is to help you achieve your goals and protect your desired lifestyle.
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
