A new year usually indicates a number of changes that will concern savers and retirees residing in the UK and abroad. To top this off, a challenging year lies ahead for UK residents who must manage rising household expenses, especially in the first quarter of 2023.
To raise more money, the government is making it more challenging for workers, savers, and investors by freezing income tax and other significant thresholds.
In this article, we have explored what pensioners and retirees might need to know about pensions in 2023 and what some of this might mean for you if you’re an ex-pat abroad.
1. Income tax changes
Increasing your pension contributions can lessen the effects of the income tax threshold freeze announced in the Government’s Autumn Statement if you can afford it. Using a pension is already a very tax-efficient way to save money. Still, according to financial experts, the current freeze, which has been prolonged until 2028, makes it much more favourable.
However, this tactic assumes you have extra money to spare for more pension contributions, which will be locked away until your mid-50s. At the same time, you may be dealing with mounting home expenses on likely inflation-behind salaries. Nevertheless, putting those very significant stipulations aside, you can anticipate hearing much from financial experts this year on the long-term benefits of pension saving.
The main benefit of pension savings is that they are made from gross (before tax) income.
The goal is to lower your tax cost by contributing to a pension. Several groups stand to gain from increased pension contributions in 2023. For example, those impacted by the extra rate income tax threshold’s April fall from £150,000 to £125,140 would gain. Others won’t, such as investors affected by the Chancellor’s tax hike on capital gains and dividends and those who have used up their Isa allowances.
How will income tax changes potentially affect UK expats?
If you are an expat living abroad and not in the UK, income tax threshold changes might not affect you, depending on whether you still earn in the UK.
2. State pension age increase
Depending on the results of a Government assessment due out soon in the new year, the state pension age increase to 68 years old could be as early as 2033. The state pension age is currently at 66, but between 2026 and 2028, it will increase to 67.
The minimum pension age to access employer-sponsored retirement plans and other private retirement assets will increase from 55 to 57 in 2028. The date of the subsequent increase in the state pension to age 68 is still uncertain, though.
However, a prior government evaluation had already suggested moving the change’s implementation date to 2037–2039, and it has since decided to take another look.
Any acceleration will be contentious since it forces people to continue working and prevents them from taking advantage of years’ worth of additional retirement income that they have accrued via National Insurance contributions. According to an analysis by pension experts, the Treasury would save around £10 billion if the state pension age was raised to 68 one year earlier than anticipated.
How will the state pension age change potentially affect UK expats?
If you are looking to move abroad after you retire, this news may mean that you will have to wait a bit longer before transitioning to an expat.
3. Pension tax relief alterations
The government could eventually be in such financial straits that it will abolish the generous pension tax structure and erect a new one far less advantageous to savers. Given the status of the public finances, this might happen as early as 2023. The current system favours the wealthy as they pay more tax since pension tax relief depends on people’s income tax rates.
Most reform rumours centre on implementing a flat tax rate, under which taxpayers who pay higher and additional rates would only receive a limited amount of relief. In contrast, taxpayers who pay basic rates would receive the same amount of relief or slightly more.
If the government wanted to save money, it would presumably be more conservative when deciding on a new single rate, and it could then probably adjust it up or down pretty much at will.
Salary sacrifice, a popular method of managing business pensions, presents a significant challenge to reducing pension tax relief because it may need to be eliminated to provide a level playing field.
However, the money generated by cutting reliefs will be constrained since savers would inevitably start contributing more to pensions to safeguard their incomes and savings from tax.
4. The survival of the State pension triple lock
By keeping its triple lock promise and announcing a 10.1% increase in the state pension starting in April next year, the government avoided a ferocious backlash from elderly voters.
For retirees who began receiving the total flat rate after 2016, their weekly income will rise from the current £185.15 to roughly £203.85, or an annual income of £10,600.
Older persons who retired before that and are currently receiving the basic state pension of £141.85 per week would see an increase to about £156.20 per week or £8,120 per year. This is topped off by additional benefits if earned during working years.
According to the triple lock guarantee, the state pension shall rise yearly by 2.5%, the average rate of wage growth, or price inflation. At 10.1%, this year’s inflation rate was the highest, so that’s how much the state pension will increase.
In late 2023, the government may have to make another difficult and possibly expensive decision, depending on how fast the Bank of England manages to bring inflation under control.
Even while it appears that this government will uphold its triple-lock promise regarding state pensions for the remainder of this Parliament, it is still being determined how the major political parties will approach the issue of state pension increases in the long run before the next election.
How will the state pension triple lock potentially affect UK ex-pats?
Suppose moving away from the UK and becoming an ex-pat is on your mind, and you have a state pension. In that case, it is worth keeping up to date on whether the triple lock guarantee remains in place; if it doesn’t, it could become a significant financial challenge for you.
5. Inherited pension pots adjustments
Currently, if a pension owner dies before aged 75, beneficiaries of pension pots invested in income drawdown plans either pay no tax or their regular income tax rate if they are older than 75. However, there are rumours that the government might target this rather generous scheme, which was implemented alongside revisions to pension freedom reforms in 2015.
The Institute of Fiscal Studies recently proposed that pension funds transferred after death should be liable to income tax and inheritance tax.
On the one hand, pensions are not meant to be utilised by the wealthy as an estate planning tool but rather to fund retirement. However, for many people engaged in drawdown plans to transfer their pension wealth to the next generation, introducing stricter rules could mean upsetting their inheritance plans.
Given the difficult financial conditions at the Treasury, it would not be surprising if the tax treatment of pensions after death were examined in advance of the upcoming budget.
One of the critical concerns, if there were reform in this area, would be whether those who have made retirement spending decisions or pension contributions would be protected.
Ready to find out more?
Do you need advice regarding your pension, or are you interested in transferring it overseas from the UK? Contact Brite to receive quality expert advice regarding your retirement.
