Anna’s Blog – Work and Pensions
The Government’s Spring Budget revealed plans which will have a big impact on lower income families, and not for the better. With the rising cost of living, rocketing interest rates, and obvious dissatisfaction amongst essential public service workers including rail workers, teachers, and NHS staff, this budget needed to provide security and support. Instead, the support has been given to higher-income and asset-rich individuals, benefitting the 1% more than the remaining 99% of the UK population.
The disparity in funding and consideration for people on lower incomes can be highlighted by the pension changes in this budget. The lifetime allowance (LTA), currently £1,073,100, has been scrapped. This means that there is no cap on what a pension can be worth to receive full tax benefits. Under the previous LTA, any amount above the allowance was taxed at 25 per cent if drawn as income, or 55 per cent if taken as a lump sum. This change will benefit a very small number of high earners.
In addition, the annual pension allowance is rising from £40,000 to £60,000. The AA is a cap on the maximum that can be paid into a pension whilst getting full tax relief. This is a huge boost to people who can afford to pay hefty sums into their pensions. You cannot pay more into your pension than your annual income so low paid workers are restricted from paying large sums into their pension, even if lucky enough to have a windfall to invest. So if you earn £18,000 a year, you can only put £18,000 into your pension. This means that the higher your income, the more you are allowed to add to your pension, resulting in greater tax benefits and a bigger pension pot for people to draw on when they retire.
One of the motivations behind this pension reform has been to retain healthcare workers, such as higher-earning consultants, to top up their pensions and retire later. The other part of this is to encourage those medical professionals who have already retired to re-enter the workplace. It is yet to be seen whether this reform will have any impact on rates of medical professionals in the UK, but as The Guardian have reported, people are “cautiously optimistic” but warned that the “pensions tax trap is not entirely fixed”.
However, despite this cautious optimism in the healthcare sector for higher earners, these changes have not been welcomed by all. As the Guardian states, this reform is “described as a giveaway to the rich, [and] have been dismissed as being only relevant to a very small percentage of the population.” The changes to pension allowances and reliefs will truly only benefit higher earners, and lower income working people are likely have to work past their retirement age in order to afford to live. This ultimately feeds into Government plans to increase numbers of the workforce, by keeping people in work as long as possible.
Lower-income workers are more likely to pay the minimum into their pension each month, if they can afford to at all, with some opting out of auto-enrolment pension provision. After the pandemic, when the cost of living began to incrementally rise, many people dipped into their pensions in order to afford to live. Pension withdrawals between April and June 2022 hit £3.6bn; a notable surge. Lots of companies and organisations made staff redundant to reduce running costs, causing redundancies to hit a record high of 370,000 in three months between August and October 2022. This resulted in many turning to their pensions to help support them, including people aged 55 and over.
Many people elected to take early retirement during the pandemic, either due to personal reasons including ill health or because their workplace was cutting staffing levels. This led to an increase in economic inactivity, with 565,000 leaving work between 2020-2022. Because of the pandemic and the impact of Brexit on the job-landscape, the Government has announced new measures to encourage people over 50, the long-term sick and disabled, and benefit claimants, back into the workplace. The Government has allotted £3.5bn over five years to these initiatives, including: £2bn investment in support for disabled people and people with long-term health conditions; £900m investment in support for parents on Universal Credit; £70m investment in support for over 50s; and £485m investment in support for unemployed people and people who are on Universal Credit and work less than full time hours.
While funding for vulnerable people, low income families and those struggling to find work is obviously welcome, this ‘Back to Work Budget’ seems more about the benefits to the economy rather than benefits for individuals themselves.
With the state pension age set to increase from 66 to 67 from April 2026, and possibly to 68 as early as 2035, more and more people will have to remain in work in order to fund their lives when they retire.
The Spring Budget announced that the State Pension amount will increase by 10%, so for those qualifying for the full new State Pension they will receive £203.85 a week (up from £185.15). For people who reached the State Pension age before April 2021, they will receive £156.20 (up from £141.85). An increase was desperately needed, as many pension claimants have been hit hard by the cost of living crisis. However, £203 or £156 per week barely covers rising utility bills and food costs. Many people will need to remain in the workforce past retirement age for as long as possible to top up their pensions.
The Government’s Spring Budget announcements have done little to benefit low and medium earning people, and are more beneficial to those who earn more than average. Pensions provide security and safety to people who retire, and people should be able and comfortable to do so without fear of entering poverty. Hard-working people, including the 1.5 million people who work in social care deserve so much more from their Government.