Page 16 - Budget 2021

Pensions

The pensions landscape has altered dramatically in recent years and continues to change. As a reminder:

• For 2020/21 there was a £90,000 increase to both of the annual allowance tapering trigger points, taking them to
£200,000 (threshold income) and £240,000 (adjusted income). However, there was a sting in the tail for people
with very high incomes: the minimum tapered annual allowance dropped from £10,000 to £4,000 (at an adjusted
income of £312,000 or more).

• Automatic enrolment for employees in a workplace pension arrangement is now fully in force, with new
employees automatically enrolled. A second increase in the minimum contribution rates took place from April
2019, raising the total (employer and employee) contributions from 5% of “band earnings” (£6,240 - £50,270 in
2021/22) to 8%. No further increases are scheduled at present. Nevertheless, pension experts generally agree that
the current overall contribution rate is too low to achieve an adequate retirement income.

• The new state pension started in April 2016, replacing both the basic state pension and the second state pension
(S2P). In the long term the reform will create more losers than winners as the earnings-related element has been
removed.
•
• State pension age (SPA) increases have stopped for the time being at age 66. An increase to 67 is due between
April 2026 and March 2028. The rise to 68 is scheduled between April 2037 and March 2039, although the
necessary legislation has been deferred and the dates could change due to a slowing rate of life expectancy
increases. By 2050 – so if you are under 40 now – you could be facing a SPA of 69.

• The government has confirmed that from 6 April 2028 the normal minimum age at which you can draw benefits
from a private pension will rise from 55 to 57.

• The lifetime allowance was due to be increased in line with inflation, but instead has been frozen at its current
th
£1,073,100 until 6 April 2026. By coincidence, that date will mark the 20 anniversary of the lifetime allowance
introduction – at a level of £1,500,000.

PLANNING POINT

The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax
years. Thus 5 April 2021 will be your last opportunity to rescue unused allowance of up to £40,000 from
2017/18.

Salary Sacrifice

National Insurance contributions (NICs) can cost up to 25.8% of gross pay – up to 13.8% for the employer and 12% for
the employee. The corollary is that avoiding NICs can save up to 25.8% of pay. A widely applied example of turning
NICs to an advantage is in the use of salary sacrifice to pay pension contributions. Instead of the employee making
personal contributions out of their net pay, the employee accepts a lower salary and the employer makes a pension
contribution. If the employer passes on all of the NIC saving, the pension contribution could be up to almost 34%
higher, as the example shows.

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