Having watched the Chancellor’s Spring Statement this week, many retirees and savers will be scratching their heads, wondering when that long-overdue support for their life savings will appear. Last week’s ‘mini-budget’ was bound to be stretched thin, needing to address numerous questions over the cost of living, a planned National Insurance hike, growth, borrowing, investment and more.
Yet some people may not realise that their savings and pensions are also materially affected by the Chancellor’s decisions last week.
What inflation means for your pension
A big theme from the Spring Statement has been the rise in the cost of living.
As salaries continue to lag behind prices, real disposable income is falling and people are being forced to tighten their belts.
While this has been widely covered in media, many commentators are yet to note that we are also on a collision course with a less obvious – but just as serious – savings crisis.
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The Lifetime Allowance has long created a ‘lose-lose’ position for pension savers and HM Treasury, with less lifetime income for retirees and less lifetime tax revenue for HM Treasury. This problem has only become more pronounced in light of the current economic climate.
With inflation heading to a 40-year high and the Lifetime Allowance left untouched in the Spring Statement, the real value of pension pots could easily be eroded by as much as a quarter in just three years.
Also not mentioned was the cap on the pensions Annual Allowance, currently at a rate of £40,000. While this is not normally an issue for those saving through Defined Contribution schemes, it has created problems for those in Defined Benefit pensions.
Through the pandemic, we have seen the likes of doctors receiving unexpected tax bills due to overtime. With wages now expected to balloon in response to inflation, the number of people who could fall foul of these unexpected tax charges could also rise with the Annual Allowance remaining frozen.
Lower income tax and the effect on your pension
One announcement the Chancellor did make was a cut to the basic rate of income tax scheduled to happen in 2024. A consequence of this for pensions is a smaller benefit from tax relief for basic-rate payers. Although this is a very small change and unlikely to impact many employees’ decisions, it does complicate the messaging around pensions.
However, investment opportunities must be made sufficiently attractive, on a risk-adjusted basis, to bring in the money.
It is now well-established that investments that are planet-friendly can also be good for people’s pockets. However, these investments can also help reduce the cost of living for the British people now, while securing the future livelihoods of pension savers.
One example of this would be investing in renewable energy. If investments in these new sources of energy can provide good returns for pension investors, while protecting customers from high prices and the volatility of the international energy markets, pension savers could get a tangible financial benefit in the short term while securing a better long-term future.
The forward look on pensions
As these new policies take effect and we begin to see their impact on pensions, many will be wondering what steps they need to take to safeguard their long-term savings. I would strongly recommend the Government’s new Money Helper service as a first port of call, where you can seek free financial guidance if in need.
Savers can also remain optimistic that, in the long-term, the Government’s promotion of forward-thinking investments into technology, energy and infrastructure should in theory provide ample opportunity for pension investment growth. How exactly the Government chooses to leverage the power of the people’s savings, however, remains to be seen.
Peter Glancy is the Head of Policy at Scottish Widows.
