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A comfortable retirement is being sacrificed for many

Moira O’Neill is a freelance money and investment writer

The chancellor had already made it clear that he would be asking everyone for sacrifices. But I’m wondering if the subtext to Jeremy Hunt’s Autumn Statement is sacrificing our comfortable retirements. While many people will be reassured by the restated commitment to the state pension triple lock, the implication of other measures is a deep freeze for those doing sensible things with their spare money.

The inflationary uplift in the state pension brings respite to retirees who rely heavily on that income. But a state pension rising to more than £10,000 in April 2023 is not even a third of what is required to retire in comfort. The Pension and Lifetime Savings Association said in October last year that a single person needed £33,600 a year for a comfortable retirement. But with inflation at 11 per cent, the comfort figure is surely now in the region of £37,296, an increase of £3,696 a year.

Plus, Hunt’s throwaway comment about a government review of the state pension age coming in early 2023 paves the way, I suspect, for retirement at 70, earlier than expected.

Meanwhile, those who hold shares and other investments outside tax wrappers fall into the chancellor’s “those with the broadest shoulders” category. They should prepare to feel some pain. Income investors will rue the reduction in the dividend allowance from £2,000 to £1,000 next year, and to £500 from April 2024.

There is also bad news for anyone looking to sell shares, other assets or second homes: the annual exempt amount in capital gains tax will reduce from £12,300 to £6,000 next year and then to £3,000 from April 2024. These exemptions were ripe for the chopping block. And it could have been worse — CGT rates could have been made equal to income tax rates. The Treasury says these measures will raise more than £1.2 billion a year from April 2025.

The sale of a second property is hard to shield from these changes. Quilter, a wealth manager, calculates that a second-home owner who bought their property in 2017 for the average house price of £227,000 would have made a gain of £67,559. Assuming they are higher-rate taxpayers, next year they would pay £17,236 in CGT and if they sold at the same price the year after, they would pay £18,076.

All of this means that, for investors, the humble individual savings account has never been so important. The annual Isa allowance of £20,000 hasn’t been increased since April 2017, but it remains the key way to shelter investments from taxes. And higher-rate taxpayers can also transfer investments to another family member who is in a lower tax bracket.

Sufficient notice is an issue for investors as well. Hunt’s decision to give only six months warning for the first and deepest cuts to dividend and CGT thresholds isn’t long enough to enable them to manage the change sensibly.

Changes to investment taxes force people to hoard assets that they may otherwise sell. Those who have worked hard to do the right thing need more notice to take action ahead of time. The tax tail shouldn’t wag the investment dog, particularly in volatile markets — but the chancellor has made this risk real.

Meanwhile, all the other allowances that enable people to plan for their futures and do sensible things with their money remain frozen, from the inheritance tax threshold to the pension lifetime allowance.

Finally, this statement was yet another missed opportunity by politicians for a full pension review. The present system of pension annual and lifetime allowances makes little sense, particularly against the inflationary backdrop.

Since April 2014, the standard pensions annual allowance has been frozen at £40,000. The lifetime allowance is the maximum size to which a pension pot can grow tax-free, above which tax is payable at 55 per cent on a lump sum. The standard lifetime allowance has been £1,073,100 since 2020 and has been frozen at this level until 2025-26. This penalises successful investment strategies as well as those who committed to consistent pension contributions.

Although the allowances are still enough to provide a comfortable income in later life, continuing to freeze the thresholds is unwelcome given soaring inflation. However, higher-rate taxpayers can still benefit from full tax relief on pensions. A flat rate of 30 per cent pension tax relief on contributions would be a fairer change and is a long-expected tax raiser.

But don’t forget that income tax allowance freezes — the noisiest of all stealth taxes — will affect retirees too. State pension increases together with uplifts to private and public sector workplace pension payments, will push half a million more people into paying income tax in retirement, according to the consultancy LCP.

That’s yet another reason to use those Isas, which shield your retirement income from tax, alongside pensions. If this Autumn Statement has set the tone, we should expect further freezes to these valuable allowances, or worse.

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