What does Jeremy Hunt’s ‘back to work’ budget mean for you?

Summary: “No one should be pushed out of the workforce for tax reasons,” says the Chancellor. With an ageing population and growing skills gap, Jeremy Hunt has taken aim at the lifetime pension allowance.

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The last time Jeremy Hunt delivered a budget speech, it was billed as an “emergency”, as he tried to fix the problems from his predecessor that had sent markets tumbling.

But springtime brings optimism and this time his outlook was a bit more positive. Recession avoided; inflation falling (from above 10% to below 3% by the end of the year); and, in his words, the UK economy is “proving the doubters wrong”.

Amid the news on energy bills (support extended), fuel duty (frozen), alcohol duty (going up), there was huge focus on getting people back to work.

Not only has Mr Hunt brought in new measures aimed at helping people return to work (such as increasing free childcare) he’s also trying to coax people into staying on and avoid early retirement.

No more lifetime pensions allowance

As he looked to encourage more over 50s to avoid early retirement, one incentive open to the Chancellor was increasing the amount they can withdraw without a tax penalty – the lifetime allowance.

With a threshold of just over £1 million, higher earners were preferring to retire early rather than pay tax on putting extra in. The allowance was referred to as the ‘doctors’ tax’ because of the number of high-earning senior NHS doctors and consultants who have been impacted.

There was some expectation Mr Hunt would increase the allowance. In fact, he’s scrapped it completely, meaning you can pay in what you like over your career without being taxed on it. The level you can pay in each year also increases from £40,000 to £60,000.

Alongside this there are changes to the tax-free lump sum. Previously set at 25% of your total pension, this is now limited to £268,275 (that’s 25% of the previous lifetime allowance limit of £1,073,100). We believe this move makes sense. People are much less likely to buy annuities nowadays.

Can the Chancellor bring retirees back?

It’s not just getting people to stay on, Jeremy Hunt also wants to convince those people who have already left, to come back to work.

This has meant tackling the issues standing in people’s way. Money is set aside for healthcare and setting up apprenticeship-style programmes known as ‘returnships’ teaching ex-retirees new skills for alternative roles.

The Treasury believes its measures could mean an extra 15,000 people in the workforce by 2028.

But will it work?

For some, certainly. In the oil and gas industry, where a lot of our clients have spent much of their careers, there’s already a long tradition of carrying out some form of consultancy work after an official retirement. Many are already doing this to some extent. However, this tends to happen less if they have been out of the workforce for more than a year or so.

For others, coming back after time out is less likely. Once you’ve had your leaving drinks and goodbye cake, if you’ve already got enough money set aside, then would you really go back? For many, retirement is a huge transition, and one that can take a while to get used to. Once that new transition has become established, the idea of returning to work can feel like a ‘backwards’ step.

The future – the downside

Looking at the bigger picture, if we wanted to take a dystopian view of the future for a second, Britain’s population is becoming top heavy – not enough young people and too many in their retirement. If the skills gap isn’t addressed, then it becomes even more urgent to stop people in their 50s and 60s from retiring.

The birth rate here is steadily declining (it’s a long time since the average family was 2.4 children, it’s now around 1.7). Meanwhile the country’s proportion of older people is increasing, with nearly 20% of the population over 65 years old.

This presents two big challenges. Firstly, an ageing population in general can put greater pressure on health and social care (according to a previous OECD report, over 65s accounted for 40-50% of healthcare spending[1]), although this depends on other factors such as income brackets. Greater numbers of retirees also put a strain on public and private pensions. Even moving away from the declining number of final salary schemes to defined contribution pensions, fewer people paying in inevitably has an impact on the pot that’s available to draw down from when you finally retire.

But… in a more positive light

Let’s look at a country like Japan, where nearly 30% of the population is over 65.

Paying people to have children hasn’t worked so far in boosting the birth rate, but at the same time, the country has also tried to shift its mindset to the other end of the scale, creating an ‘age-free society’ where older people are encouraged to stay healthy, play an active role in society, and aren’t written off as merely senior citizens.

Could this be the future for ageing societies?

What does this mean for you?

Returning to the Chancellor’s plans – what will they mean for your retirement?

Removing the lifetime allowance could be a very positive step, particularly if you’re in the ‘accumulation’ stage of your career. With the potential for punitive charges if you’ve saved above the taxable level now gone, planning for your pension has suddenly become a lot less complex.

As for the proposals to bring people back to work? We think there will be a sliding scale of those who are attracted by this. Some will jump at the chance, others – having already planned to get to this stage – will be less keen to switch direction now.

Whether it’s close at hand or a long distance away, if you’d like more advice on what the proposals could mean for your retirement, please get in touch.

 

[1] Dang T., Antolin P., Oxley H., Fiscal implications of ageing: projections of age-related spending, OECD Economics Department Working Paper, OECD, 2001. In Ageing societies:The benefits, and the costs, of living longer