Pensions-savvy contractors won’t do next to nothing on retirement saving, as Jeremy Hunt regretfully did at Spring Budget 2024

When we said on the eve of Spring Budget 2024 that this won’t be a Budget for pensions, we meant it – and listening to him speak on March 6th, it seems chancellor Jeremy Hunt agreed with us.

In fact, with the dust now settling on his electioneering patchwork of Spring measures, we can safely say that Spring Budget 2024 was a fairly quiet for pensions, writes Angela James of Yolo Wealth.

Positive pension takeaways of Spring Budget 2024 – includes the triple lock

Pleasingly, the chancellor let on that he remains committed to the ‘state pension triple lock.’ This is the term used to describe the government’s commitment to increase the state pension by whichever is highest of average earnings growth - CPI inflation, or 2.5%.

So Hunt is continuing to  ensure that our state pensions don’t lose real value over time. That’s very much needed given his inaction on March 6th on tax thresholds – an inaction which results in many more of us being dragged into thresholds which land us with higher bills from HMRC.

UK state pension as a contractor…

For some contractors right now, Hunt maintaining the triple lock may not seem of huge value. In your forty-somethings, for example, it’s easy to feel a little despondent at times that you won’t get our state pensions until later years. For most of us, that’s age 67 or 68.

The state pension however, £221.20 a week for 2024/25, remains the foundation of retirement planning. It’s an assured basis for a secure income for our later years and it’s encouraging that this government payout is keeping up with inflation. That’s even though the overall sum is still inadequate enough to make private pension provision a no-brainer.

Meanwhile, Spring Budget 2024 didn’t interfere with the pension annual allowance being held at £60,000 a year, and £10,000 a year for those who trigger the money purchase annual allowance.

What is the Money Purchase Annual Allowance?

The money purchase annual allowance is an allowance that replaces your normal pension allowance, if you have started to take money out from a defined contribution pension.

If you have accessed funds from your defined contribution pension, then you could be lumbered with this reduced allowance.  

This maintaining of two key allowances should be welcome by contractors both outside and inside IR35; it’s a lucrative means to reduce your income tax burden and save for later years.

A pensions boon for inside IR35 contractors, and potentially umbrella company staff too

Remember, pension allowances are especially important as a contractor as they provide a way for you to invest from gross income. Should you be outside IR35, then you can make gross contributions from your limited company’s saving on corporation tax, and save income tax if you are an inside IR35 contractor. And if your umbrella company allows it, then you may also be able to make gross contributions from your contract income before tax and national insurance.

Again, as Hunt at Spring Budget 2024 did not uplift any tax allowances (which remain frozen until 2028), and he didn’t alter thresholds to account for inflation, his upkeep of these thresholds came as a bit of a relief.

Pension Lifetime Allowance to reduce

 However, this government’s previously announced move to abolish the pension Lifetime Allowance is going ahead.

For the unfamiliar, the ‘LTA’ was an upper limit on your overall allowable tax-free pension savings. This was £1,073,100 in the current tax year (2023/2024), and any pension savings over this allowance were subject to tax penalties upon retirement.

You now can hold an unlimited level of funds within your pensions, however there will be a new limit of £268,275 available as a tax-free lump sum at retirement. This will now be the lower of 25% or £268,275, when your retirement begins, replacing the commonly known ‘25% pension tax free cash sum.’

Lump sums and death benefits

There is also an upper limit imposed on lump sums and death benefits. This is a new allowance imposed on lump sum payments or death benefits and limits the amount of tax-free benefits for pensions. Payments over this new allowance will be subject to income tax and are capped at the previous equivalent LTA of £1,073,100. If you are fortunate enough to reach these levels of pension savings, then the landscape for effective tax planning is now much more a little more complicated. So careful planning will be required.

Elsewhere, Spring Budget (SB) did disappoint those of us who were expecting Hunt to expand the “pension pot for life” model. What was primed for consultation has been demoted, it seems, as the government now prefers that it is ‘committed to exploring’ the pension pot for life concept.

The government has said that analysis and engagement would both be undertaken, as part of the value for money framework to ensure the concept would improve outcomes for savers.

On the shelf: the pension pot for life

But the sense is that Hunt is less keen on the idea all of a sudden.

Many advisers in my space feel that the practicalities of one pension pot for life might be difficult to administer.

In principle, the concept makes a lot of sense, as consumers do find it hard to keep track of multiple pensions, so combining could save investors money in the long run. And with one single pension, individuals may make more effort to keep up with how their money is invested as its simply easier to focus on one. But as it’s on the shelf, I’ll stop outlining the perks as for now, contractors shouldn’t expect one pension pot for life any time soon!

It’s ‘as you were’ on Auto Enrolment

There was similarly no action from the chancellor on the current ‘Auto Enrolment’ rules, even though revisions or a review of the current ‘AE’ rules might be no bad thing.

It’s been some 12 years since Auto Enrolment launched, and perhaps overall it has been successful in its initial objectives. But not a single mention of AE at SB signals no changes to the current regime. For the majority of limited company contractors, though, this has no bearing as most are exempt and choose to make their own pension arrangements.

Yet for umbrella contractors who do ‘opt in’ to their umbrella’s basic AE pension, perhaps some revisions to the legislation -- such as qualifying earnings or the percentages required for investment, might have encouraged more brolly contractors to save more for their retirement.

A 'default' defined contribution funds consultation

What Spring Budget 2024 does contain is a proposal to consult on requiring the publication of “default” defined contribution funds, which would be a boon for those contractors with a dotted history of old employer pensions, left frozen in their backgrounds.

Announced under the FCA’s so-called ‘value for money proposals,’ the suggestion is that contract-based DC pension schemes will be required to compare the performance, costs and other metrics.

Sadly we do not know what these other metrics are of these solutions, pertaining to at least two alternative schemes managing over £10billion in assets. My sense is that the government wants to provide more transparency around theses “default” solutions and make sure that investors aren’t languishing in funds providing poor value to its members. A huge number of consumers invest in default fund solutions, especially consumers not actively engaged in regular financial advice. This can be costly to investors if they are subpar solutions.

Final thoughts

All in all, then, election-engineered Spring Budget 2024 was a bit of a non-event for pensions.

But just because the chancellor didn’t do much with retirement savings this month, doesn’t mean you should do next to nothing too. To help you build a nest egg, and inspire your investment, updated guidance from me on pensions provision as a limited company will follow on ContractorUK. This guidance is in addition to new calculations revealing the cost of delaying proper pensions provision. Tax efficiencies for limited companies will be outlined by me as well, alongside details of HMRC reliefs and respites available to you if you’re an umbrella company employee.

Remember, despite Hunt not showing them much love last week, pensions continue to be an HMRC-compliant method of tax-free saving for contractors -- whether brolly or limited, meaning they continue to be the single most efficient tax planning investment you can make.