BudgetNov 23 2017

Budget gives advisers a breather on pensions changes

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Budget gives advisers a breather on pensions changes

There was little to commend the Budget to the House as far as pensions were concerned, which has commended it to advisers who are already busy dealing with successive Budget changes.

In advance of the chancellor standing up on 22 November, market pundits had predicted further tax changes, particularly in the realm of pensions, as well as changes to help boost social care, protect workers in the so-called gig economy and lay some solid foundations for preventing pensions fraud.

But the lack of pensions announcements by chancellor Philip Hammond meant a Budget which had been widely anticipated as the 'big reformer' of pensions tax relief turned out to be a no-show. 

Indeed, as Jon Greer, head of retirement policy at Old Mutual Wealth, has commented, this was a “dull and boring Budget on pensions”.

Pension tax relief

The fact there was no tinkering with tax relief was a reason for a collective prayer of thankfulness among the pensions industry. 

There had been speculation tax relief on pensions would be reduced by restricting tax relief to the basic rate of income tax, or perhaps a middle ground between the higher rate and basic rate.

The increase in the personal allowance to rise with inflation means that more workplace pension savers may fall into a tax hole. Jon Greer

Steven Cameron, pensions director at Aegon, says: “The lack of any mention of pension tax relief is very unusual for Budgets but very welcome. Implementing any change would have been hugely complex and required legislation in a parliament dominated by Brexit.

“Pension tax relief does reduce the chancellor’s tax take in the short term, and there’s a case for redistributing this to those most in need. But this should be done only once there has been time for proper debate and not rushed through as a government cost cutting measure.”

For some, this was a “missed opportunity” to help make pensions less complicated. Phil Brown, head of policy for LV, comments: “It is a shame the chancellor continues to shy away from introducing a flat rate of tax relief for pension savings or removing the lifetime allowance.

“Both of these reforms would make the pension system easier to understand and encourage more people to save.

“We hope these haven’t fallen off the agenda completely and the government will continue to consider them.”

Indeed, there were no more cuts to the highest end of pension savings, with the government stating it was committed to previous pledges to let the lifetime allowance (LTA) rise in line with CPI (although the higher RPI would have been more welcome).

When the LTA came in, as part of the 2006 A-Day changes to simplify pensions (how we laugh now), the LTA stood at £1.5m, rising to £1.75m in 2009-2010. It was slashed in previous Budgets to £1m in the 2016/2017 tax year.

Had the original £1.5m LTA been linked to the RPI from the start in 2006, it would have doubled in value by 2016, according to calculations by Chartwell Financial Services. The excellent LTA graph created by Chartwell, seen below, details this succinctly.

However, former chancellor George Osborne linked the LTA to the CPI in 2015, which means, according to the current Budget documents, that the LTA will rise to £1.03m for 2018-2019.

Says James Gladstone, head of wealth planning at Cazenove Capital: “The small inflationary increase to the LTA of £30,000, taking it to £1,030,000, is insufficient to prompt a review of strategy on this point. 

“However, it was good to see the government not choosing to abolish this promised inflation-linked increase in the LTA and once again dip into the pension funds of those prudent enough to save for their own retirement.”

While there were no big pensions tax changes, this does not mean the threat has disappeared completely. As Mr Greer says: “Pension savers can breathe easy – for now. 

“Changes to pensions tax relief will continue to loom large for years to come so long as government borrowing remains at all-time highs and spending demands ask ever more from the Exchequer.”

Pensions and the gig economy

Many commentators expected the chancellor to talk about bringing in some form of pension coverage – perhaps a form of auto-enrolment – for the gig economy. 

According to the Office for National Statistics, there are approximately 4.8m self-employed workers in the UK – a significant proportion of the total 32.06m of the UK’s working population. 

However, many of these do not have any self-funded pension provision and, by the very nature of being self-employed, have no workplace benefits such as protection or pension arrangements.

There were hopes that the current auto-enrolment framework, which was brought in under the Coalition government in 2012, could be extended to allow those working in the gig economy and the self-employed to be able to join a form of compulsory pension.

It was expected that self-employed contributions could be taken through the annual self-assessment forms at the end of each financial year.

Jade Connolly, head of advice at Ascot Lloyd, comments: “Following the big win for the ‘workers’ of Uber at the courts, it would not have been a surprise if the government tried to legislate big company treatment of workers in the ‘gig economy’.”

However, she adds: “The classification of the workers as employees would have massive tax implications for the company, and any other company operating in a similar manner.”

This will surprise many, given the chancellor’s focus on technology and future-proofing our workforce. Paul Falvey

A study from Zurich and the Pensions Policy Institute (PPI) published earlier this autumn had suggested that implementing a form of auto-enrolment for gig economy workers could help boost their pensions savings by up to £75,000.

Modelling carried out for the study, called Restless Worklife: Protecting the Gig Economy Worker, estimated that a typical worker now aged 25 earning £25,000 could end up with a £75,600 lump sum at retirement. 

This is based on the Taylor review recommendation of enabling individuals to put aside 4 per cent of their income when completing tax returns. 

When combined with the state pension, this would equate to an income at retirement of £13,500.

If the worker had been auto-enrolled into a workplace pension, removing the current restrictions in place on minimum earnings, they could end up with a final lump sum of £101,500.

This, when added to the state pension, could give them an income per year of almost £15,000 at retirement.

But no mention was made of extending auto-enrolment to self-employed and gig economy workers in the Budget – although the Work and Pensions Committee and the Department for Business, Innovation and Skills, did sneak out a draft bill on Employment and worker status: definitions on the morning of the Budget.

Paul Falvey, tax partner at BDO, says of the lack of attention given by Mr Hammond to the self employed: “This will surprise many, given the chancellor’s focus on technology and future-proofing our workforce.”

That said, in October, FTAdviser reported on PPI figures which showed only 2m self-employed workers would meet the eligibility thresholds for joining a workplace pension with the current workplace pensions framework. 

Pensions pain in the personal allowance

In the Budget, Mr Hammond confirmed a rise in personal allowances. In April 2018 the basic rate personal allowance will rise to £11,850 and the higher rate threshold to £46,350. 

The raising of the personal allowance threshold has been welcomed generally, but there is a fear this could affect the lowest-earning workers who fall within the earnings band for auto-enrolment, which starts at £10,000.

The Department for Workplace Pensions has previously estimated that approximately 280,000 who earn between £10,000 and the current personal allowance of £11,500 would not benefit from tax relief on their contributions if enrolled in a pension scheme that uses a net pay arrangement.

As Mr Greer explains: “The increase in the personal allowance to rise with inflation means that more workplace pension savers may fall into a tax hole. 

“If workers are auto-enrolled into a workplace pension scheme that operates tax relief through the “net pay arrangement” system, but have earnings below the new income tax threshold of £11,850, they will not get tax relief because they are under the tax threshold”.

Pension scams 

There was no reminder of the government’s work to prevent pension scams being perpetrated on the people of Britain.

In August this year, the City of London Police revealed £42m had been lost from pension pots to scams within just two years of the 2014 Budget, when then chancellor George Osborne announced the pensions freedom and choice regime.

However, earlier this month, the government announced that draft legislation to ban cold calling (including texts and emails) will be published in early 2018.

James Walsh, policy lead for engagement, EU and regulation at the Pensions and Lifetime Savings Association (PLSA), says: “We have been calling on the government to show more urgency in tackling pension scams, so this indication of when we can expect draft legislation is a step in the right direction. 

“But we are still a long way from the cold calling ban actually taking effect and the government will need to keep up the momentum.”

Later Life

Exceptionally little was said about social care or later life care, either in the Budget speech itself or the accompanying documents. 

Responding to the Budget, Mike Adamson, chief executive of the British Red Cross, says: “We are disappointed the Budget has not specifically addressed the funding shortfall for adult social care in England.

“We are relieved the government has recommitted to its Green Paper on social care; clarity on the future of our care system is vital. However we are concerned the paper will be limited to only focus on older people. We must ensure adults of all ages are given the care they deserve in order to live independent and fulfilling lives.”

Mr Cameron adds: “The government had its fingers burnt by manifesto proposals on social care funding, but really can’t keep avoiding such an emotive and far reaching issue. 

“Those hoping the chancellor would kick start a public consultation on this will be disappointed by the announcement of a delay till next summer. 

“Financial advisers tell us they see this as a key growth area for clients seeking advice over the coming years, but to plan ahead with certainty, we need a sustainable deal between individuals and the state, setting out clearly what the government will pay and what individuals will be personally responsible for.”

According to Mr Brown: “This was an ideal opportunity to encourage people to save for their care costs in their retirement and therefore must remain a priority.”

One of the unintended consequences of the restrictions on pensions savings has been that those near or over the lifetime allowance have less incentive to take risks with their pension savings. Kay Ingram

However, there may have been one sop hidden within the Budget papers. On page 32 of the Autumn Budget documentation, HM Treasury did state the qualifying care relief and self-funded shared lives payments.

Qualifying care relief (QCR) is a tax simplification covering expenses incurred when providing care, which means carers only need to keep simple records. 

The document states: "The government will extend the scope of QCR to cover self-funded shared lives payments to encourage the use of shared lives care."

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Also within the Budget, Mr Hammond affirmed the government’s intention to continue bolstering innovation from UK Plc by extending investment opportunities.

Yet there needs to be more clarity for pension funds and trustees when it comes to investing their member’s money in things such as infrastructure and technology.

Commenting on the government’s announcement to provide pension funds with guidance on long-term investments, Liz Field, chief executive of the Personal Investment Management and Financial Advice Association (Pimfa), says: “This is a welcome announcement by the chancellor and we await guidance by the Pensions Regulator. 

“The increase in participation in private pension saving since the introduction of automatic enrolment has seen the beginnings of a shareholder revolution within the UK.”

According to Ms Field, millions of savers now have a financial interest in organisations, property and various other asset classes to which they previously had no exposure. 

While this is beneficial in terms of choice and diversification, she stresses the need for transparency.

Ms Field adds: “We support any moves which provide pension funds with clarity on new and innovative ways to grow their members’ money and believe steps that encourage investment in innovative firms will only help to encourage a sense of mutual ownership and engagement among UK consumers.”

Kay Ingram, director of public policy, also welcomes the chancellor's recognition that pension savings are "an important source of capital for business investment". 

She believes the chancellor could kill two birds with one stone - boosting investment into infrastructure and technology by removing the penalties attached to breaching the LTA.

Ms Ingram explains: "One option for the government to consider would be to cancel the recovery charge on excess benefits over the lifetime allowance where these are designated to this type of investment.

"One of the unintended consequences of the restrictions on pensions savings has been that those near or over the lifetime allowance have less incentive to take risks with their pension savings. 

"Any upside gains are heavily taxed, once the allowance is exceeded but with no compensating relief if the investment falls in value.

"Ways of redressing this need to be sought and we would be keen to contribute to this debate as we understand the behavioural influences on those clients who have been discouraged from taking risk by the lifetime allowance restrictions."

One will have to wait to see if Mr Hammond takes the industry up on such suggestions and thereby implements a mutually beneficial strategy.

Simoney Kyriakou is content plus editor for FTAdviser