InvestmentsFeb 1 2016

The pensions revolution is not over yet

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The pensions revolution is not over yet

While 2015 saw some of the most radical changes to the pensions landscape in almost a century, pensions are the subject of continued Treasury scrutiny. In the Budget on March 16, the chancellor is likely to announce even more changes.

George Osborne’s post-election Budget last July introduced welcome flexibility to the way pensions can be accessed. He also introduced fairer ways in which valuable pension assets can be passed on to spouses or children, in particular with the abolition of the 55 per cent pensions ‘death tax’.

This has already started to alter the way investors view their pension assets and how they are reordering their tax affairs and succession plans to take account of the new flexibilities.

Those who integrate the management of pension portfolios within the context of a family’s overall wealth and succession planning have adjusted the ways in which they advise clients who need to draw down on their capital or income – in retirement or otherwise – with Isas often assuming precedence now in the ranking of what to ‘hit’ first in certain circumstances.

Following a further consultation process last autumn, Treasury ministers are now considering a White Paper that contains options for changing the tax treatment of contributions, particularly the tax rebates for higher and additional-rate taxpayers, which are estimated to cost HM Revenue & Customs £35bn a year.

With reduction of the £1.5trn deficit in his sights, we have already seen the chancellor reduce the lifetime allowance that can be saved into personal pensions from £1.25m to £1m, and the annual contribution limit that qualifies for full marginal-rate tax relief tapering down from £40,000 to £10,000 for earners of £150,000 and above per year. Both of these measures come into force this April.

Following the White Paper consultation, it is thought the chancellor will target the tax relief on contributions. Options under consideration are for a flat rate of tax relief of 20, 25 or 30 per cent for all.

There is ongoing uncertainty for earners and those trying to plan contributions to their pensions James Johnsen

Another option floated by the Treasury is to abolish all tax relief on contributions and instead allow tax-free withdrawals from 100 per cent of a pension scheme, producing something akin to a ‘pensions Isa’. This would supposedly provide immediate tax gains for the Treasury, but at the expense of tax receipts from pension income drawn down later on.

While Mr Osborne can dress a reduction in tax relief as a redistributional move made in the interests of fairness, this idea, combined with those two measures already announced, will not be popular among many ordinary pension savers and will represent a massive disincentive to better-off earners.

It can only be hoped such measures can be introduced with an element of sensitivity to investor behaviour or there will be a huge rush for people to make contributions before the April (or other) deadline. This will put yet more pressure on hard-pressed pensions companies grappling with the effects of the new rules on drawdown.

Despite all this, many will now see a self-invested personal pension (Sipp) as a useful alternative investment vehicle in their overall portfolio mix, much like an Isa, and will wish to find a suitable platform on which to have it managed. This is in contrast to the rigidities and inflexibilities of the life company offerings, whose personal pensions products are bedevilled by lack of transparency, impenetrable jargon and opaque charging structures.

Competition among the many Sipp providers is likely to increase, with a decrease in fees, more streamlined servicing and further segmentation into the higher-end providers offering integrated pensions advice, and the lower-cost, more commoditised offerings for smaller pension savers offering little or none.

Finally, with many independent financial advisers withdrawing from pensions advice because of the costs of regulation and burden of compliance, and the remainder requiring substantial fees for the time it takes to complete the technical analysis and produce a recommendation, many pension holders will find access to detailed advice harder to come by.

While pensioners in drawdown or those approaching retirement have some degree of clarity, there is ongoing uncertainty for earners and those trying to plan contributions to their pensions.

Higher earners should seriously consider maximising the current contribution allowances and tax rebates in this tax year, if they can, and those who are coming to the end of their higher pensions-saving life should consider applying for the fixed protection of the £1.25m lifetime allowance while it is still available.

James Johnsen is head of business development at Church House Investment Management