Pensions, Tax Allowances and the Life you Want

Category: Annual Allowance & Budget & pensions & Tax

All Budgets are a mixture of the financial and political, so whether you view them favourably or not will depend on your personal circumstances and views.

The announcement which generated the most headlines this year was that pension allowances would be significantly increased:

  • The maximum amount which can be added each year will rise from £40,000 to £60,000
  • Any amount can be built up in a pension over your working life without incurring a tax charge on withdrawal
  • For those who have previously taken income from their pension funds, the amount which can be replaced will rise from £4,000 each year to £10,000

The stated rationale for these changes was to encourage more doctors and consultants to remain working in the NHS. Whether these measures are the best way to achieve this objective I’ll leave to the politicians, and the Labour Party have already said they would reverse them if they form the next Government.

Governments of any persuasion are too focused on the short-term to be trusted to look after pensions policy which should be, by definition, long-term. We desperately need a plan where individuals are encouraged to save for their future, confident that any decisions they make will not be rendered pointless in the future.

But I’m wondering whether the measures announced will actually do what Jeremy Hunt wants them to.  

It seems to me there are two likely responses:

  • If I work more hours and for longer I can build up a bigger pension fund and save lots of tax
  • Now my pension will not suffer a high tax charge I can retire earlier with the same net amount of money

Each individual doctor or other high earner will, of course, make their own judgement on this, but if we accept that many in these positions – particularly within the NHS – are suffering considerable levels of stress, the second course of action is at least as likely as the first.

As financial life planners the whole focus of the work we do at Serenity is on how the money you have can be used to provide the life you want. Conversations we will be having with clients affected by these changes will not primarily be on the tax potentially saved – although we will, of course, be advising you on this – but, rather, the opportunities they may bring.

  • Is continuing to work affecting your physical and mental health?
  • Do you still enjoy your work?
  • How motivated are you to carry on?
  • Are there other things you would rather be doing?
  • What impact would stopping work have on your partner, family and community?

There is an old saying that you should not let the tax tail wag the investment dog, but even more fundamentally, you should never let the tax tail wag your plans for the future. They are much too important for that.

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