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Workers saving for retirement may not have faced the attack on their pensions from Chancellor Rachel Reeves that many feared.
But his budget was still packed with policies and details that reveal that saving for retirement could become more difficult.
Here’s how the Budget could affect your pension savings and what you can do now to build a golden retirement.
By planning ahead, you can enjoy a happy, carefree retirement, with plenty of vacation time, despite Rachel Reeves’ budget.
1. Start saving as soon as possible
Pensioners will need an income of up to £48,161 to afford a “comfortable” retirement in 2030, according to analysis of Office for Budget Responsibility figures, which were published alongside the Budget.
A comfortable retirement currently costs £43,100 for a single person, according to the Pensions and Lifetime Savings Association (PLSA). This would cover eating out, treating loved ones, and the occasional holiday.
But pensioners will need an extra £5,000 a year by 2030 to achieve this standard of living, inflation figures in the OBR report suggest.
Some of this annual sum should be covered by the state pension, but the PLSA figures assume you own your home outright.
That income may be out of reach for most retirees. But it’s worth saving into your pension as early as possible and contributing what your budget allows.
For example, someone who started paying 5 per cent of a £25,000 salary into their pension at the age of 22 would have a retirement fund of £434,000 at age 66, according to investment platform Fidelity.
This assumes your employer also contributes 3 per cent, which is the minimum they are required to pay under workplace pension automatic enrollment rules.
But if the same worker waited until age 27 to start contributing, they would have a retirement fund worth £380,000 by age 66, £54,000 less than if they had started saving earlier.
2. Use duty-free wrappers
Experts feared the Chancellor would make pensions or Isas less generous, but she suspended implementation of both.
However, there is no telling what lies ahead, so it makes sense to use the subsidies you have at your disposal now.
Pensions may attract inheritance tax when left to loved ones from 2027, due to measures announced in the Budget. But they retain the rest of their benefits.
That means all the money put into your pension qualifies for tax relief, subject to generous annual and lifetime allowances. If you save for a workplace pension, you also receive contributions from your employer.
Many employers match employee contributions. That means that if, for example, you are a higher rate taxpayer, for every £60 you put into your pension, the Government will increase it by up to £100. If your employer matches your contributions, you would end up with £200 in your pension if you contribute £60.
The Chancellor on Wednesday increased capital gains tax on investment profits. The new higher levels took effect overnight.
A basic rate taxpayer who makes more than £3,000 in profits when selling shares will now pay 18 per cent CGT, up from 10 per cent.
Higher-rate taxpayers will see their capital gains tax rate increase from 20 percent to 24 percent.
That means pensions and Isas, which allow you to grow your money free of tax on interest, capital gains or dividends, are more valuable than ever.
Jason Hollands, managing director of wealth manager Evelyn Partners, says higher CGT rates mean everyone should focus on using Isa and pension wrappers to save.
“Making use of tax-free wrappers is especially important if you are married or in a civil partnership and can take advantage of both sets of reliefs and transfer savings and investments so that they do not attract unnecessary tax liabilities,” he adds.
3. Ask about salary sacrifice
Some employers offer a plan that allows workers to increase their pension at no additional cost to them or their employer.
Workers accept a reduction in their salary equal to the amount they contribute to their pension. In return, their employer pays the full contributions to the employee’s pension.
The benefit is that, as the worker sacrifices part of his salary, both he and the employee pay less contributions to the IN – and the worker also pays less income tax.
These savings can then be used to increase the worker’s pension. For a worker, this amounts to free extra money in their pension.
Some experts feared the Chancellor would crack down on this generous benefit, but we’re waiting for the next day. However, it makes sense to take advantage of it while you can.
Myron Jobson, senior personal finance analyst at investment platform DIY Interactive Investor, notes that salary sacrifice can be a useful way to make your primary income appear lower.
That may mean you will be eligible to receive benefits that are only available to those with incomes below certain thresholds.
For example, families lose entitlement to child benefit if one parent earns more than £60,000.
In some cases, workers in this position who are just above this maximum can reduce their salary below it.
4. Help your children
Children also enjoy generous tax-free allowances which can boost their savings.
For example, you can pay up to £9,000 a year into a child’s Junior Isa, where their money can grow tax-free.
Alternatively, you can pay up to £2,880 into a pension for them each tax year, which the Government will top up to £3,600.
The power of compound interest means that money saved for children can grow astronomically when they can access it in retirement.
For example, if you put the maximum £2,880 into a baby’s pension when it was born, it would be worth almost £72,000 by the time it was accessed at the age of 60, even if a single penny had never been added to it.
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