What does the Budget mean for your pension?
Hint: it’s not what you think…
If you live in the UK, like me, you will have been listening out last week for news from the Chancellor Rishi Sunak. And if you’re over 50, you will have no doubt been particularly interested in how his Budget announcement will affect your pension.
On the surface, the news wasn’t good: The Government has announced that it will be looking to savers to help with the cost of the pandemic. The pension lifetime allowance, along with the capital gains annual allowance and inheritance tax threshold, will all be frozen until 2026.
This means that the pension lifetime allowance, which is the total amount you can pay into a pension and still get tax relief, will stay at £1,073,100 until 2026. And although this will save the Government what is estimated to be £250million a year, it’s not good news for higher earners who are still saving, those who have saved a lot already early on in their working lives and whose investments have done well – as well as anyone in a final salary pension scheme, such as doctors and headteachers.
To recap, the pension lifetime allowance was introduced at £1.5m in 2006, peaking at £1.8m in 2010-2012. It’s since been going through a succession of cuts and freezes, and it’s now linked to inflation.
Don’t focus on the details
At first glance, this might seem like bad news for those saving towards retirement. But in reality, is it really details like this that we should be focusing on? Or are things like the pension lifetime allowance really nothing more than deckchairs being moved around on the deck of the Titanic?
If you’re wondering what I mean, consider this. The majority of people will outlive their savings, so a few pounds more saved here, or a few less there don’t really make a lot of difference.
In other words, chasing money – or Fantasy Funds as I like to call it – is a bit of a waste of time. Life expectancy in the US and UK is currently 83 but a large percentage of baby boomers are likely to live to 90 and beyond, so how will they fund their retirement? In a word (or two) – they won’t.
And if their funds run out in their 80s, they can hardly expect to be able to go back to work, given that their physical and mental health will have diminished by years of inactivity.
Treat the issue – not the symptoms
So, what do I suggest? That we stop focusing on the minutiae and look at the real issue here. You can’t treat the symptoms of a problem and expect a resolution of the problem.
Of course, you need to make sure your finances are in order as you move towards retirement: I’m not suggesting you don’t do that. But your finances are, in fact, only a symptom of the problem. And the problem itself is a lack of purpose.
If this intrigues you, then instead of reading more about Mr Sunak’s budget, why not discover what ‘symptom’ you are treating, instead of looking for the underlying cause, by taking my quiz.
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