Budget 2023: how it will affect you

Was it the back to work budget? Before his announcement a lot was made of Chancellor Jeremy Hunt’s need to boost growth in the face of a possible recession.

As it was, the Office of Budget Responsibility revised their predictions, with Hunt proclaiming there would be no “technical recession” and the economy now predicted to grow by around 2% in each of the next three years.

Budget 2023: what are the headlines?

Maximise your pension pot with no penalties

Many forecasters had suggested Hunt might raise the ceiling for the Pension Lifetime Allowance, the total amount you can save into your pension fund before paying tax on it, which stood at £1,073,100.

Instead, he abolished it altogether, which means that you will soon be able to save as much as you like into your pension fund without handing any of it over to HMRC.

It was sold as one of the strategies for getting some of the seven million working adults who are not in work back at the coalface. After all, growth needs productivity.

Brits rightly treasure the NHS and Hunt pointed to it as an example for why he was getting rid of a pesky pension tax that might cause some to feel there wasn’t any point in working further if they were going to get taxed on the money they accrue.

“I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most,” said Hunt.

“I do not want any doctor to retire early because of the way pension taxes work.”

However, we’re wondering how much of an incentive it will be for people with that much in their pension pot.

If they have £1m in their pension pot, they can look forward to an annual pension income of £40,000 per year for the rest of their life if they retire at 60 and buy an annuity. This would put them in the ‘Freedom and Luxuries’ retirement lifestyles category in our My Forecast tool.

For comparison, the median annual UK salary currently is £33,280 according to the ONS. And at the last count, there were only 1700 pension pots that had more than £1m in them.

Save more into your pension each year tax free

What might be better news for people who want to bolster their post work income is the news that the annual Tax Free Allowance (TFA) is rising from £40,000 to £60,000.

Which means if you have the money to max out your allowance every year, you’ve now got the opportunity to make more from the taxman.

Before Hunt’s statement today, anyone putting £32000 into their pension within the tax year would get tax relief of 25%, or £8000. This made the total £40,000 – the amount you could put into your pension every year without having to pay tax on it.

Now that the TFA has risen, you can put in £48,000 and the tax relief of 25% will add another £12,000, making the total the £60,000 you are now allowed.

This means that if you’re already adding £32,000 to your pension annually and you can increase that payment by £16,000 the changes announced in the Spring 2023 budget mean you can make an extra £4,000 from HMRC.

How many people in a cost of living crisis might be able to achieve these sort of payments? We took a look at our own customers and found that less than 5% of Penfold customers were able to maximise tax free allowance payments in the last tax year.

More free childcare to change Gender Pension Gap?

The budget follows hard on the heels of International Women’s Day, where we drew attention to the Gender Pension Gap, the difference between the pension savings of men and women, which currently stands at 38%. One of the main reasons for this is career gaps that happen when women have children.

Penfold has found that the average cost to put your child into a nursery full-time is £55.39 a day or £1,106.52 a month. The chancellor has now made it easier for women to return to work and still get the sums to add up, announcing that 30 hours of free childcare would be extended to cover one and two year old children.

Conclusion

Whilst the budget announcements are enticing for high earners, if that's not you, don't worry. There are still plenty of short term actions you can take to put you on track for a comfortable retirement.

At Penfold, we’re all for encouraging more people to save more for their future and we love figuring out ways they can do that. Keep an eye on our blog section for regular tips but here’s three to get you started:

Increase your take home pay with Salary Sacrifice.

Get a clearer picture of your retirement income

Some tax hacks that give back

With investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice and past performance is not a reliable indicator of future performance.