After the storm of the radical Budget changes

Advisers, pension providers and seemingly even parts of HM Revenue & Customs and the FCA were wholly unprepared. So far reaching was the scope and scale of the announcement that it took weeks, not days, for most commentators to understand the full implication behind the detail. One early conclusion has withstood scrutiny though: Sipp providers are extremely well placed to meet the opportunity and ensure that savers have the full range of options available as promised in the Budget.

An examination of all the key changes will help understand why, although it is important to understand that many are still subject to consultation.

Already available to a minority (investors with a secure minimum income of £20,000 a year) through flexible drawdown, this was the Budget’s single most important change, magnified by the sound bite that announced it: “Let me be clear: No one will have to buy an annuity … People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.”

Sipp providers have years of experience providing retirement income for those who choose not to annuitise. Through the various regimes – drawdown, unsecured income and alternatively secured pension – they have built up experience and systems to pay out income under PAYE, and to vary it according to the needs of each individual.

Through the various legislative changes over recent years, the majority of Sipp providers’ systems have proved resilient and adaptable. That is in stark contrast to traditional pension providers, who have struggled to implement changes such as varying rates of drawdown and the removal of alternatively secured pensions.

Pension investors face tax rates of 55 per cent at two points in retirement: a tax on funds already crystallised and a tax on funds uncrystallised when the investor has passed the age of 75. That rate of tax is now under consultation, with some commentators already speculating that it will be set lower than the current inheritance tax rate of 40 per cent, perhaps as low as 20 per cent.

Reducing this rate to the same level of IHT, or even lower, tempers the initial view that these changes will result in investors rushing to withdraw all their pension funds from age 55. It would provide significant incentive and confidence to consider pension funds as an important, holistic part of estate planning. Sipp providers are well placed to take advantage of these changes. Their investors tend to be wealthier and have greater need of such planning: Sipp providers can look forward to them keeping their funds and staying invested for longer.

Complementing a review of the rate of tax on death is a further review on whether tax relief on contributions should continue beyond age 75. Changes to how pensions are treated beyond the age of 75 are increasingly outdated and sit uncomfortably alongside a regime that will soon see the state pension start to pay out only a few years earlier. The number of people still working well into their 70s continues to increase, a combination of improved longevity and fewer manual jobs than a few decades earlier.

Should the restrictions on tax relief be lifted Sipp providers can expect to see an increase in those saving beyond the age of 75, keeping their Sipps longer than today.

That summarises the key pension changes as announced in the Budget. But there are some other potentially significant outcomes that may follow.

The battle between Isas and pensions had looked a little one-sided in recent years and, even as the Budget brought in significant enhancements to pensions it also made two key changes to Isas. Firstly, the annual Isa contribution limit was raised to £15,000 for both cash and investment. Secondly, previous years’ contributions into investment Isas can now be transferred into cash Isas (before the Budget it was only one way – cash to investment).

How could this benefit Sipp providers? Some Sipp providers have diversified, effectively becoming platforms and offering investment Isas too. There is a real risk that many of those investment Isas will be transferred to cash over time, as investors seek greater security and accessibility. That would dampen revenues but those Sipp providers that did not diversify will remain unaffected.

No changes to the lifetime allowance were announced but it has never been under more pressure.

With a lower, sensible annual allowance of £40,000 the lifetime allowance looks increasingly akin to a tax on sensible saving and good investment performance. Should a future review of tax relief conclude that it should be set at one common level then the last scrap of justification for the lifetime allowance will be removed.

The lifetime allowance currently represents a highly unpalatable uncertainty for savers who start to approach it, knowing that positive investment fluctuations can bring them a significant tax charge. While there will be some who hold the view that this is adding benefit for just a few of the ultra wealthy, it is worth considering that there are already some savers who have exceeded the lifetime allowance level of £1.25m just by using their annual Isa allowance and investing very wisely.

But within the Sipp market there will be both winners and losers. Smaller Sipp providers are already under considerable pressure, built up by years of regulatory change, three thematic reviews and the soon-to-be published capital adequacy verdict. But those providers who charge fees based on the value of the assets and who have investors with low average fund sizes are also likely to be pressured. That demographic of Sipp investors is the most likely to withdraw more or all of their pension fund come April 2015, and a reduction in assets under administration will lower their revenue. If there is a reluctance to increase prices then there will be significant emphasis on acquiring new business to maintain their balance sheets.

Finally, a quick word on the old saying that absence makes the heart grow fonder. Annuities are not quite gone but their demise is being widely predicted. While a reduction in new sales is likely it will not fall to the extent that many have predicted. The other significant change announced in the Budget was that providers will need to offer face-to-face guidance (swiftly changed from advice, as originally announced in the Budget). When faced with an array of different choices there will still be many who choose the certainty, simplicity and security offered by an annuity, be that for all their fund or just part of it.

Greg Kingston is head of marketing and proposition for Suffolk Life

Key points

Sipp providers have years of experience providing retirement income for those who choose not to annuitise

The lifetime allowance currently represents a highly unpalatable uncertainty for savers who start to approach it

Smaller Sipp providers are already under considerable pressure, built up by years of regulatory change, three thematic reviews and the soon-to-be published capital adequacy verdict