Five things that everyone needs to know about pensions in 2022

It pays for everyone to keep a close eye on what is going on in the world of state and private pensions, and how this might affect their own retirement provisions. The New Year is a good time to look at whether you are saving enough to fund the sort of retirement you want, for its likely duration.

‘All workers should make themselves aware of the tax benefits around pension saving, and employees should check what is on offer from their employer in terms of matched contributions,’ says Adrian Lowery, personal finance expert at investing platform Bestinvest. ’Defined contribution company scheme members could also do themselves a favour by checking and reviewing how their pension pot and future contributions are invested.’

‘And given that the majority of self-employed workers are not auto-enrolled in a scheme, there is an even greater urgency for them to keep on top of their saving strategy for retirement,’ he adds. ‘Whether you are in the middle of your career, about to retire or already putting your feet up, there are a few issues around pensions that are worth keeping an eye on in 2022.’

1. Suspension of triple lock means a 3.1% state pension rise

Under the triple lock, the state pension is meant to increase every year by the highest of consumer price inflation, average earnings growth or 2.5%. But with post-pandemic earnings growth spiking to more than 8% - and Government coffers stretched – the Chancellor suspended the earnings element for the tax year 2022-23. This means pensions will rise by 3.1%, which was the rate of UK consumer prices index inflation in the year to September 2021. However, with inflation having surged ahead of this and predicted by the Bank of England to exceed 6% this year, those reliant on the state pension are going to feel the squeeze.

The basic state pension is currently £137.60 a week and next April it will rise by £4.25 to £141.85, or around £7,370 a year. That is topped up by additional state pension entitlements - the now abolished S2P and Serps - if you paid for them during your working years. The full flat rate for people retiring since 2016 is currently £179.60 a week and will rise in April by £5.55 to £185.15, or around £9,630 a year.

With pressure on public finances growing all the time, Government pronouncements at the Budget and elsewhere will be closely watched for their intentions around reinstating the triple lock – or otherwise.

2. The lifetime and annual allowances are frozen

The Lifetime Allowance is a limit that applies to the amount of pension benefit that can be taken without triggering an extra tax charge and affects those whose total savings are close to or exceed a certain amount. That amount had for a few years been increased in line with inflation – even though it has been cut drastically from its peak of £1.8 million around 2010 - and so was expected to rise to £1,078,900 from 6 April 2021. But it was frozen in the Budget at £1,073,100 – and will stay there until April 2026.

This five-year freeze will significantly increase the numbers of savers that the LTA affects, and means they could suffer hefty tax charges of 55% on retirement on the amount of their pension pots that exceed the LTA. Questions around the LTA and how it should or should not influence saving and crystallisation of benefits are very complicated and best addressed to a pensions expert or financial adviser.

The annual allowance is the limit on how much money you can build up in your pension in any one tax year while still benefiting from tax relief. For most people this allowance is also frozen at £40,000, or 100% of your earnings if you earn less than that (and the cap includes the tax relief itself). If you exceed it, a tax charge is made which claws back any tax relief that was given at source. There are tougher and more complex rules for very high earners.

3. There could still be a pensions tax raid

Whether Chancellor Rishi Sunak will reduce pensions tax relief to help shore up the public finances has been – particularly since the cost to the Treasury of the pandemic became clear - a continual source of speculation. Pensions tax relief allows workers to save out of untaxed income, which means the benefits are greater for 40% and 45% marginal tax rate payers than for those who pay the 20% basic rate.

The most drastic step would be to cap pensions tax relief at 20% for everyone. It has been estimated that a move to this ‘flat-rate’ of relief could raise £10 billion for the Treasury. There are a number of other options open to Sunak that would be less controversial but also raise less. Watch the contents of the red briefcase closely at the next Budget, which will probably be in the latter half of March.

4. Final salary schemes could be taken over by ‘superfunds’

Final salary pension schemes are those where employers promise to provide a retirement income linked to what you earned with them when employed, such as two-thirds of final salary. Most of these schemes - also called ‘defined benefit’ schemes because the pension payout is pre-determined and ‘guaranteed’ - have been shuttered, but the pension obligations of some companies are still massive. Members of such schemes, even if they are reliant on them for only a portion of their pension, should keep their ears to the ground.

Employers could start offloading such schemes to new 'superfunds' after regulators approved the first such operation last year. Many companies have been awaiting regulatory approval of superfunds, which potentially offer them a more affordable strategy than currently exists to ditch onerous and costly final salary pension responsibilities. Deals will be closely watched by the Pensions Regulator, which has stressed that savers will be protected and the process will be subject to strict criteria and scrutiny. So in theory members of schemes that end up with superfunds should see little or no practical difference - but it’s always vital to keep track of who is responsible for your pension.

5. Will you have to retire later than you had expected?

The Department for Work and Pensions is taking another look at the issue of when the increase in state pension age to 68 should kick in. Both men and women's state pension ages are currently 66, and between 2026 and 2028 they will both rise to 67. The increase to age 68 is currently scheduled to happen between 2044 and 2046, which would affect those born on or after April 1977. A Government review has already recommended this should be brought forward to 2037-2039, due to calculations around life expectancy data, projected costs to the Treasury and labour market trends.

This would mean people born from the early 1970s onwards face a later state pension age, which in turn could force a delay in retirement for those cohorts. However, there is also speculation that slowing gains in life expectancy will prevent the current review recommending the controversial step. The review is due to conclude in spring 2023.