Pension

Pension Credits can provide extra income to those over State Pension age and on a low income. The credits were first introduced in 2003 to help keep retired people out of poverty. There are two main parts to Pension Credit.

The first part is referred to as the ‘Guarantee Credit’.

Pension Credit can top up:

• your weekly income to £201.05 if you are single; and
• your joint weekly income to £306.85 if you have a partner.

If your income is higher, you might still be eligible for Pension Credit if you have a disability, you care for someone, you have savings or you have housing costs. Not all benefits are counted as income.

The second part of Pension Credit is referred to as the ‘Savings Credit’.

You could get the ‘Savings Credit’ part of Pension Credit if both of the following apply:

• you reached State Pension age before 6 April 2016; and
• you saved for retirement, for example a personal or workplace pension.

Recipients get up to £15.94 Savings Credit a week if they are single and up to £17.84 a week if they have a partner.

It is possible to qualify for one or both parts of the Pension Credit.

Recipients of Pension Credits will automatically get cold weather payments and are also eligible to apply for a free TV licence if they are aged 75 or over and to assist with NHS costs if they receive the ‘Guarantee Credit’ part of Pension Credit.

The new pension tax reforms that were announced in the recent Spring Budget took effect from 6 April 2023. The old £40,000 cap on annual pension contributions has been increased by 50% to £60,000, with effect from 6 April 2023. Tax relief for contributions to pension schemes is given at a taxpayer’s marginal rate of Income Tax and is subject to the increased underlying limits. Taxpayers will continue to be able to carry forward unused annual allowances the last three tax years if they have made pension savings in those years.

The lifetime allowance was the maximum amount of pension and/or lump sum that benefits from tax relief. The lifetime allowance was removed from 6 April 2023 and will be fully abolished in a future Finance Bill. Both of these changes are intended to incentivise older employees to continue in work whilst continuing to build additional pension savings.

In addition, the adjusted income threshold for the Tapered Annual Allowance increased from £240,000 to £260,000 on 6 April 2023. Those earning over £260,000 (from 6 April 2023) will see their £60,000 annual allowance tapered. For every complete £2 income exceeds £260,000 the annual allowance is reduced by £1. The annual allowance cannot be reduced to less than £10,000 (2022-23: £4,000). The Money Purchase Annual Allowance also increased to £10,000 (2022-23: £4,000) from 6 April 2023.

The maximum amount that most individuals can claim as a Pension commencement lump sum (PCLS) was historically based on a cap of 25% of the available lifetime allowance. In the current tax year, there remains a PCLS upper monetary cap of £268,275 (based on 25% of the 2022-23 lifetime allowance). Any individuals who already had a protected right to take a higher PCLS will continue be able to do so.

One of the key measures of the Spring Budget was the announcement that the £40,000 cap on annual pension contributions will be increased by 50% to £60,000 from 6 April 2023. Tax relief for contributions to pension schemes is given at a taxpayer’s marginal rate of Income Tax and is subject to the increased underlying limits. Taxpayers will continue to access carry-forward, unused annual allowances for the last three tax years if they have made pension savings in those years.

The lifetime allowance is the maximum amount of pension and/or lump sum that benefits from tax relief. Although it was expected that the lifetime allowance would increase, the Chancellor made the unexpected announcement that the lifetime allowance of £1,073,100 is being abolished from 6 April 2023. Both of these changes are intended to incentivise older employees to continue in work whilst continuing to build additional pension savings.

The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023. Those earning over £260,000 (from 6 April 2023) will begin to see their £60,000 annual allowance tapered. For every complete £2 income exceeds £260,000 the annual allowance is reduced by £1. The annual allowance cannot be reduced to be less than £10,000 (2022-23: £4,000). The Money Purchase Annual Allowance will also increase to £10,000 (2022-23: £4,000) from 6 April 2023.

There will be other incentives to help get over 50’s back to work including expanding the DWP’s “Mid-life MOT” Strategy. This helps people to access financial, health and career guidance ahead of retirement. There will also be a new kind of apprenticeship targeted at the over 50s who want to return to work, called Returnerships.

Automatic enrolment for workplace pensions has helped many employees make a start on providing for their retirement with the advantage that employers and government are also contributing to their pension pot.

The law states that employers must automatically enrol workers into a workplace pension if they are aged between 22 and State Pension Age and earn more than the minimum earnings threshold. The minimum threshold has remained fixed at £10,000 since 6 April 2014. The employee must also work in the UK and not be a member of an existing, qualifying pension scheme. Employees can opt-out of joining the pension scheme if they wish.

Under the rules, employers are also required to offer their workers access to a workplace pension when a change in their age or earnings makes them eligible. This must be done within 6-weeks of the day they meet the criteria.

Under the automatic enrolment rules the employer and the government also add money into the pension scheme. There are minimum contributions that must be made by employers and employees.

Both the employer and employee need to contribute. There is a minimum employer contribution of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief.

The contributions are based on the qualifying earnings brackets highlighted above; this means that for many employees the 8% contribution rate will not be based on their full salary.

Under current rules, you can claim tax relief for your private pension contributions. The annual allowance for tax relief on pensions is £40,000 for the current tax year. There is a three year carry forward rule that allows you to carry forward any unused amount of your annual allowance from the last three tax years if you have made pension savings in those years. There is also a lifetime limit for tax relief on pension contributions. The limit is currently £1,073,100 and will remain frozen at that level until at least April 2026.

You can get tax relief on private pension contributions worth up to 100% of your annual earnings, subject to the overriding limits. Tax relief is paid on pension contributions at the highest rate of Income Tax paid.

This means that if you are:

• A basic rate taxpayer you get 20% pension tax relief
• A higher rate taxpayer you can claim 40% pension tax relief
• An additional rate taxpayer you can claim 45% pension tax relief

The first 20% of tax relief is usually automatically applied by your employer with no further action required if you are a basic-rate taxpayer. If you are a higher rate or additional rate taxpayer, you can claim back any further reliefs on your Self-Assessment tax return.

The above applies for claiming tax relief in England, Wales or Northern Ireland. There are regional differences if you are based in Scotland.

A defined contribution pension (sometimes referred to as a money purchase pension scheme) is a type of pension scheme where the pension pot is based on how much money is paid into the scheme. This is markedly different to a defined benefit pension schemes which usually relates to workplace pensions where the pension provider promises to give you a certain amount each year when you retire.

A defined contribution pension can be a company or private pension. The pension pot is based on monies added by you and / or your employer. This money is invested by the pension provider. The final return with these pensions is not guaranteed and the value of the pension pot can go up or down depending on how investments perform.

There are three main options available at retirement, lifetime annuity, flexi-access drawdown and a lump sum payment. These options can be used on their own or in combination. The first 25% drawdown is tax-free and the remainder is taxed at the individual’s marginal rate.

There are no overall limits to employer or employee contributions and no upper limit to the total amount of pension saving that can be built up. However, there are limits that affect tax relief on pension contributions including an annual and lifetime allowance.

Under current rules, you can claim tax relief for your private pension contributions within certain limitations.

The current annual allowance for tax relief on pension contributions is £40,000. You can also carry forward any unused amount of your annual allowance from the last three tax years if you have made pension savings in those years.

Additionally, there is a lifetime limit for tax relief on pension contributions. The limit is currently £1,073,100.

You can qualify for tax relief on private pension contributions worth up to 100% of your annual earnings, subject to the overriding limits. Tax relief is paid on pension contributions at the highest rate of Income Tax paid.

This means that if you are:

• A basic rate taxpayer qualifies for 20% pension tax relief.
• A higher rate taxpayer qualifies for 40% pension tax relief.
• An additional rate taxpayer qualifies for 45% pension tax relief.

The first 20% of tax relief is usually applied by your employer with no further action required. If you are a higher rate or additional rate taxpayer, you can claim back any further reliefs on your Self-Assessment tax return.

The above applies for claiming tax relief in England, Wales or Northern Ireland. There are regional differences if you are based in Scotland.

The pension savings annual allowance for tax relief on pensions has been fixed at £40,000 since 6 April 2014. The annual allowance is further reduced for high earners. Since 6 April 2020, the tapered annual allowance increased from £150,000 to £240,000. 

This means that anyone with income below £240,000 is not affected by the tapered annual allowance rules. Those earning over £240,000 will begin to see their £40,000 annual allowance tapered. For every complete £2 income exceeds £240,000 the annual allowance is reduced by £1. The annual allowance cannot be reduced to be less than £4,000. The annual allowance can also be affected if the taxpayer flexibly accessed their pension pot.

There is a three-year carry forward rule that allows taxpayers to carry forward unused annual allowance from the last three tax years if they have made pension savings in those years. The calculation of the exact amount of unused annual allowance that can be carried forward can be complicated especially if subject to the tapered annual allowance.

There is also a pensions lifetime allowance that needs to be considered. The limit is currently £1,073,100.

There are special rules which allow individuals who have set up private pension scheme(s) to benefit from significant tax reliefs when saving for their retirement. There is no overall limit to the amount of employer or employee contributions and no upper limit to the total amount of pension saving that can be accumulated. However, there are important limits that affect the tax reliefs available. For example, you will usually need to pay a tax charge if your private pension pots total more than £1,073,100. There will also be tax to pay if your pension contributions exceed £40,000 in any tax year, unless covered by unused relief from the previous three years, (this £40,000 limit may be reduced for high income earners).

Certain pension benefits can be taken tax-free. In general, you can take 25% of your pension pot as a one-off lump sum without paying tax but the remaining 75% must be used to buy an annuity, to secure an adjustable income or taken as cash (with tax due on the balance). You can also take smaller cash sums from your pension pot and 25% of each chunk would be tax free.

However, it is important that taxpayers are aware of the tax position when receiving pension income. Apart from the special tax-free benefits, pension income is treated as earned income for Income Tax purposes and any Income Tax payable is calculated as per the usual rules. The personal allowance for the current tax year is £12,570. There is no liability to pay National Insurance contributions on pension income.

Income Tax is also due on the State Pension, earnings from employment or self-employment and any other taxable income received.

The triple lock guarantee on pensions that was suspended for the current 2022-23 tax year is to be restored from April 2023. In September 2021, the government announced that its triple lock guarantee on pensions was to be abandoned for one year due to unprecedented fluctuations to earnings caused by the COVID-19 pandemic.

The triple lock guarantee was first introduced in 2010 and had remained in place until April 2022. The guarantee had seen the full yearly State Pension increase by over £2,050 in this period. The triple lock is the mechanism used to calculate increases to the state pension each year. Under the triple lock guarantees the basic state pension rises by whichever is the highest out of average earnings growth, inflation or 2.5%.

The confirmation that the government will reinstate the triple lock from April 2023 means that the state pension increase will be based on the reading of the consumer price index (CPI) for September 2022. Based on current forecasts this is likely to be significantly higher than the forecast inflation rate for 2023-24 and likely to be in the range of a 10% increase. 

The change was announced in Parliament by the Chief Secretary to the Treasury and remains subject to the Secretary of State’s review. This decision will bring some cheer to many of those in receipt of the State Pension especially following the changes this tax year and the inflationary pressures affecting the real value of their pension.