Six big pension changes to expect in 2024

It’s no exaggeration to say 2023 has been a seminal year for pensions.

Among the headlines, the government’s decision to scrap the lifetime allowance (LTA) – the amount you can build up in your pension without paying tax – took everyone by surprise, and the “pension pot for life” reforms could spawn the biggest shake-up to the workplace regime for more than a decade.

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While savers stand to benefit from these changes, there is still a great deal of uncertainty as we head into 2024.

With a general election looming and the prospect of a new government, the pension landscape’s future is not set in stone. And although inflation has eased significantly, it may pose a threat to your retirement savings for some time yet.

With all this in mind, weoutline what you need to know for 2024, and flag six big pension changes that could affect how you grow and protect your retirement wealth.

1) State pension boost

The government’s decision to maintain the triple lock for another year was warmly welcomed by retirees.

Pensioners are looking forward to an 8.5% rise to the state pension in April 2024, the second-biggest percentage rise in the last 30 years. This increase will take the full state pension from £10,600 to £11,502 a year, although those who retired before April 2016 are on a different system and many will only get £8,812 a year.

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There are no other big state pension changes expected in 2024, and the government is unlikely to tinker with the existing system this side of the election.

2) Inflation eases but threat remains

Red-hot inflation is expected to cool next year, with the Office for Budget Responsibility (OBR) predicting it will drop to around 2% by the end of 2024.

But some experts think it will prove more stubborn, meaning you might need to increase your savings to achieve the same standard of living in retirement. The good news is that, with wages rising faster than inflation, the cost-of-living crisis is beginning to ease, which will hopefully make pension contributions slightly more affordable.

If inflation continues to soften, your retirement savings may not have to work as hard to keep pace with rising prices. Finding inflation-beating returns was particularly tough 12 months ago when UK inflation was in double digits.

3) Dwindling tax breaks

Shrinking dividend and capital gains tax (CGT) allowances will make protecting your wealth from the taxman inside an ISA or pension even more important next year.

In April 2024, the CGT allowance - the investment profits you can realise every year without paying tax - is reducing to £3,000, down from £6,000 in 2023-24 and £12,300 in 2022-23.

Any gains that exceed this allowance are taxed at 10% and 20%, for basic-rate and higher-rate taxpayers, respectively. A capital gain of £10,000 outside of tax wrappers could leave you with a £1,400 tax bill, if you’re a higher-rate taxpayer.

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Likewise, the amount of dividend income you can earn before paying tax is reducing to just £500 tax year, down from £1,000 this year and £2,000 in 2022. Current dividend rates are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.

With an investment portfolio of £50,000 yielding 4% dividend income, you could end up paying up to £500 dividend tax on shares held outside an individual savings account (ISA) or self-invested personal pension (SIPP).

Acting before April to make use of this year’s allowances could potentially save a big tax bill down the line. For example, you could sell your existing investments, keeping any gain under the threshold for tax, and use the proceeds to re-buy investments inside a pension or ISA. This will shelter any future growth and income from the taxman.

4) Mansion House reforms

Last summer, Jeremy Hunt announced major plans to boost the UK economy by encouraging workplace pension schemes to invest more in unlisted smaller companies, including in the UK.

The so-called Mansion House reforms won’t take full effect until 2030 and aren’t expected to impact SIPP savers, who can choose themselves where to invest. The hope is that over time, pension savers will see a slight improvement in investment performance as smaller companies tend to grow faster than established large companies. The chancellor reckons the reforms will boost the “typical pension” by over £1,000 a year.

But there are no guarantees here. Smaller companies can be volatile, so while returns can be greater, losses can be too.

5) Pension pot for life

One of the biggest surprises in the 2023 Autumn Statement was Hunt’s pension “pot for life” announcement, which could be a game changer for pension savers.

This would allow you to ask your employer to pay into a pension scheme of your choice, instead of being forced to join your company’s scheme.

However, it’s too early to know whether “pot for life” will see the light of day. And even if approved by the government, it could take years to come to fruition; there are lots of practical details to iron out.

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In the meantime, there’s no need to wait for these changes to take control of your pension wealth. Consolidating several existing workplace pensions into a single plan could save you time and money in the long run. Just make sure you won’t miss out on any valuable benefits.

There’s nothing to stop you asking your employer to pay into a pension scheme of your choice now. Some employers have already opened up the idea to their staff.

You might also be able to transfer part of your current workplace pension pot to a SIPP to give you more control over that portion of your retirement pot. If this appeals to you, check with your current workplace scheme to see if they allow partial transfers.

6) Lifetime allowance no more

For people with big pension pots, the abolition of the LTA last year was amazing news. You can now save and invest for your retirement without fear of being stung with punitive tax charges when the time comes to draw your money. Under previous rules, you could face a tax bill of up to 55% on pension savings which exceeded £1.07 million.

However, the decision to scrap the LTA did come with a sting in the tail.

There will now be a £268,275 cap on the tax-free lump sum you can take from your pension. If you have existing LTA protections then check with your provider, as you may have access to a larger tax-free lump sum in some circumstances.

With the end of the tax year drawing closer, there is more good news for pension savers.

You can now enjoy more generous annual pension allowances than in years gone by. In April 2023, the annual allowance - the amount you can save into a pension every year and get tax relief - rose from £40,000 to £60,000.

Meanwhile, high earners and retirees also have more scope to pay into a pension and shield tax from HMRC, with the tapered and money purchase annual allowances both increasing from £4,000 to £10,000.