Pensions: six changes to watch out for in 2024

Savers often leave it too late when it comes to pensions, which can result in a big hole in their finances when they retire.

As Standard Life boss Andy Curran recently told City A.M., some 14m people were facing a hole in their finances when they settled down for retirement.

So it’s best to keep an eye on any changes that could affect the value of your investments.

“For investors of all ages, the benefits of pension saving are only going to become more important in the next year,” says Alice Guy, head of pensions and savings at Interactive Investor. “A rising tax burden makes pension tax relief even more valuable and gives an immediate boost to your pension wealth.”

With that in mind, here are six areas to watch when it comes to pensions next year.

1. State pensions

The state pension will rise by 8.5 per cent in April 2024, the second-biggest percentage rise in the past 30 years – although those who retired before 2016 are on a different system and will not see the same increase.

The increase is based on wage growth of the same amount, in line with the government’s “triple lock” on pensions – a government pledge to increase the state pension by the highest of earnings growth, inflation, or 2.5 per cent.

In 2016, the old pension – a basic rate plus various top-ups – was replaced by a flat-rate pension.

Aside from the rise, there are no big state pension changes expected next year; Guy suggests that big announcements are unlikely “this side of the election”.

2. Inflation

From a 41-year high of 11.1 per cent, inflation cooled to 6.7 per cent in the third quarter of 2023, the Office for Budget Responsibility (OBR) has said. The OBR predicts that inflation will hit the 2 per cent target in the second quarter of 2025.

High inflation will erode the value of your pension over time.

However, wages are now starting to rise above inflation – pay rose at a rate of 7.7 per cent between July and September this year, faster than inflation.

This makes pensions contributions more affordable as people have more spare cash to invest.

3. Tax

Tax allowances are shrinking, meaning that you won’t be able to keep as much of your income from selling assets or earning dividends.

This leads to fiscal drag: where taxpayers are “dragged” into paying more tax when the government increases taxable income on things like assets, without the basic tax rate being changed.

“This makes using your pension – or an ISA – to protect your money “even more important next year”, Guy said.

She added: “Acting before the end of the tax year in April to make use of this year’s allowances could potentially save a big tax bill down the line. You could sell your existing investments, keeping any gain under the threshold for tax, and use the proceeds to rebuy investments inside a pension or ISA.”

4. Mansion House reforms

In 2022, Jeremy Hunt announced plans to encourage workplace pension schemes to invest in smaller, unlisted companies.

“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,” Guy said.

The government has said that the reforms could increase pensions by over £1,000 a year for the average saver, although they will not take full effect until 2030.

5. Pots for life

Jeremy Hunt’s “pot for life” will allow savers to choose their own pension provider. Workers will be able to ask their current as well as future employers to pay into the scheme of their choice.

Guy warns that although this could take “years to happen in practice”, it might be a “game changer” for savers.

6. Lifetime allowances

Lifetime allowances – the total amount you can build up in all your pension savings without a tax charge – were abolished last year.

However, there will be a cap on the tax-free lump sum you are allowed to withdraw from your pension, of £268,275.

This may not be bad news for people with big pension pots. “If you have existing lifetime allowance protections then check with your provider, as you may be able to keep a higher tax-free allowance in some circumstances,” Guy said.