Opinion  

A Budget for savers?

For the pensions industry the recently anticipated reduction of Lifetime Allowance seemed to be the biggest blow.

LTA is set to be reduced from April 2016 from £1.25m to £1m. It was of course dropped from £1.5m to £1.25m just a year ago. Bear in mind back in 2010/11 it was at £1.8m so we will see a near halving of the LTA within a five-year period. This is a good example of a policy which is politically astute because it looks like it is a tax on fat cats only when in reality it is likely to have an impact on more and more middle-earners saving into a DC pension as time goes on. Experts estimate that a £1m DC pension pot will buy an inflation-linked income of around £28,000 a year; compared to £35,000 with a £1.25m LTA. You are better off of course in a DB scheme where a £1m pot still delivers a good £50,000 a year income.

However if one does end up going over the £1m pot size it is okay until you trigger a Benefit Crystallisation Event. Withdrawing money, however you do this, is a BCE, even via UFPLS (Uncrystallised Fund Pension Lump Sum). Also, when you reach 75 years this is considered another BCE but dying thereafter is not.

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So for those of us living well over 75 years (again that is more and more of us) there is a strong potential that good asset performances could push pension pots well over £1m without a tax hit. Add to this the fact that new pension reforms allow you to leave your fund to whoever you fancy inheritance tax free, and the combined changes suddenly make it much more attractive to keep healthy pensions invested and mitigate IHT by so doing.

Add to this the fact that, as annuity purchase ceases to become the default option for the vast majority at-retirement, many more retirement age individuals are likely not to be buying one. Others will even be cashing in their existing annuities (now this has been announced in this Budget); it is entirely conceivable that providers will be looking after more pension assets post Freedom Day changes - albeit a lower percentage of these assets will be locked into an annuity.

This leaves a couple of ‘real’ threats for major name pension providers: the first being unscrupulous pensions liberation ‘sharks’ stimulating their policy holders to cash out altogether; and the second being the leaking of assets from higher charging legacy books onto D2C platforms unless they can agree systems for automating bulk migration of legacy scheme holders’assets to more efficient, lower charging schemes, perhaps operating on wrap platforms.

A lesser risk is that more long-term savings will be built up in Isas instead. Several Budget announcements offered boosts to Isa-based saving. A major tax break was offered to first-time buyers if they save for the deposit on their first home in a new ‘Help to Buy Isa Scheme’. Essentially it means that for every £200 saved in this new Cash Isa, the Government will top it up by a further £50.