Income tax cut to offer ‘positives’ for retirees – but long-term 'negatives' may surface

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The income tax cut from 20 to 19 percent announced recently has caught the attention of individuals on the cusp of retirement, as well as those who have already left the workforce. Express.co.uk spoke to a host of pension and tax experts who offered their insight on what the changes could mean. 

Holly Mackay, Founder of Boring Money explained the reason behind the recent pension volatility.

She said: “When the Chancellor cut taxes in the mini-Budget, he sent a clear signal he was prepared to borrow more.

“This impending glut of bonds in the market sent their price falling as spooked international investors dumped them and looked for safer alternatives.  

“Falling bond prices had a knock-on impact on our pensions, which often have a substantial allocation to these bonds.”

READ MORE: Widow fears ‘money will run out’ after state pension age change

However, Mark Routen, Head of Tax at Hoxton Capital Management, warned while there has been “political upheaval”, all may not be as it seems.

He said: “Most of this can be viewed as hysteria and a reluctance of the establishment to change the status quo.

“The idea of the fiscal event was to create growth so the country will have more wealth to share between all elements of society.

“For those looking to retire, there were no direct benefits in the fiscal event, however, the mood of the Government looking to cut taxes and grow the economy may lead to changes in the near future that could benefit them.”

For those who have retired, or are retiring imminently, Daniel Wood, Financial Planning Director at 7IM, told Express.co.uk there “positives for all”.

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He added: “Reducing the level of income tax retirees and those who are about to retire pay is a significant benefit and will provide additional flexibility. 

“It will allow individuals to either increase the level of income they are drawing from their pension, at no extra tax cost, at a time when the cost of living is increasing; or reduce the level of gross income being drawn without reducing an individual’s net monthly drawings. 

“Reducing the level of gross income being drawn can improve the sustainability of an individual’s retirement pot, aiding longer-term retirement planning and possibly increasing the value of any legacy left to beneficiaries.”

However, while some experts believe there are positives to be had, others have warned Britons there may be less than positive effects.

Romi Savova, CEO at PensionBee, explained:: “While the income tax cut is positive in the short term, it may have a negative impact on one’s pension savings.

READ MORE: HMRC issues scam warning to self assessment taxpayers

“This is due to pension tax relief; the bonus pension savers usually receive from HMRC on their personal pension contributions, added at the marginal tax rate. In a nutshell, this means when the income tax rate falls, so does the amount of tax relief on pensions. 

“For most basic rate taxpayers this means the tax top-up they’ll receive on their pension contributions will fall from the current 25 percent to 23 percent. 

“Ultimately, changes to income tax rates that result in lower pension contributions will leave retirees with smaller pension pots and less retirement income over time, due to the power of compound interest. 

“While those set to retire imminently will be less affected by the income tax change, younger workers who have longer to save will feel a greater impact and may want to consider using the money saved by paying less income tax to boost their pension contributions.”

However, when it comes to tax relief, there is a specific figure Britons can bear in mind, according to Nick Sinclair-Wilson,  Chartered Financial Planner at BRI Wealth Management.

He added: “The reduction in basic rate income tax could be worth up to £377 in tax relief for those who receive income more than the basic rate band.”

Max Sullivan, Wealth Planner at Kingswood, also crunched the numbers and the potential benefits for retirees.

He said: “For those thinking of retirement, the changes will be welcomed. It could mean a healthy boost to their retirement income with income tax reduction, national insurance hike reversal (paid until state pension age) and capped energy bills. This may well encourage some to move up their retirement plans.

“For example, a 60-year-old retiring in the tax year 2023/24 on £30,000 income a year from all sources, would have an extra £609 per-year in their pocket, just with the income tax and National Insurance contribution changes alone, in comparison to the current 2022/23 tax year.”

As with all pension decision-making, the experts who spoke to Express.co.uk recommended caution.

They encouraged people to seek advice if necessary, as the decisions an individual makes could impact them for decades.



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