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Digesting the budget
comment-speech

At lunchtime on Wednesday (15 March), in a set piece of political theatre, Chancellor Jeremy Hunt unveiled those few remaining bits of the Spring Budget not already leaked to the media. 

These included reducing the amount of tax due on a pub pint of draught beer, although supermarkets still retain their tax advantage here. The duty on draught beer is actually paid by the brewers so we need to see how much of this they pass on to publicans. 

But this is small beer.

The Office for Budget Responsibility (OBR), which provides cover for the chancellor’s made-up fiscal rules, said that the outlook for the economy looking five years ahead was slightly less awful than it had predicted just four months earlier.

As you know, we got lucky with a mild winter, so energy prices fell by more than anticipated. The chancellor spent two-thirds of the £25bn a year improvement in the fiscal outlook, since November, on his budget measures.

The OBR never says whether a policy is a good idea, only whether the numbers add up. But the numbers are based around its forecasts – and these are no better (or worse) than others.

Thus, when the chancellor says that the OBR says that the UK will avoid recession, this is largely semantics and should not be taken as gospel. 

What is less spoken about is that two completely different forecasts are used to guide policy makers.

The OBR is used to set fiscal policy (taxing and spending) while the Bank of England makes its own forecasts to set monetary policy. These views can often be quite different. 

The OBR’s model is partly based on market expectations for interest rates, and these are particularly volatile at present.

For example, their latest forecast was made before the collapse of Silicon Valley Bank and the loss of confidence in Credit Suisse which may yet have serious implications for growth and interest rates.

The Budget itself was full of sensible measures to promote economic growth along with supply side measures that, in time, will remove the disincentives to work for those who say they would prefer to work, such as the disabled and mothers of young children.

An obvious way to improve productivity is to get more people working. 

The unpleasant changes to personal tax rates were already made last Autumn. The chancellor said he was keeping Isa limits unchanged – just to let you know he had been thinking about whether or not the regime was still too generous.

On the plus side, Chancellor Hunt undid the wilful damage done by two previous Conservative chancellors by abolishing the Lifetime Allowance (LTA) for pensions.

This was done under the guise of encouraging doctors back to work. Whether or not it will be enough to tempt retired medics back into the workforce remains to be seen but it might halt the current exodus and avoid an escalating NHS crisis ahead of the next election. 

Remember that the original unstated target of the LTA was public sector workers on generous final salary pension schemes.

But it was those with perennially less secure defined contribution pension plans who were quicker to grasp what was happening.

Those in their late 40s and 50s realised that even if their pots only grew at a modest rate, it was quite likely they would be hit by the LTA ceiling.

This realisation would easily dis-incentivise people to save in a pension for retirement at the one time in their lives when they might be able to afford additional contributions. Was there ever a more counter-productive pensions policy? 

The removal of the Lifetime Allowance charge this April - to stem the flow of retiring medics ASAP and reduce the immediate NHS salary bill for locums - and the abolition of the LTA from next April has been welcomed by almost everyone other than the opposition.

Obviously. Some will be encouraged to increase their pension contributions immediately while others might wait. 

But do not think that the abolition of the LTA means the Treasury has agreed to underwrite an uncapped amount of associated tax relief on your contributions.

It would not be a surprise if the chancellor were later to impose a lifetime allowance on pension tax relief.

This might be mixed in alongside a policy that moves to a flat rate of 30 per cent tax relief for everyone. "Last year we made it easier for people to get back into work and now we want to reward them for staying in work with higher tax relief for the majority, as part of our levelling up agenda,” he might say.

And then there is the matter of the now apparently unfair tax-free lump sum.

By diligently saving into Conservative-inspired defined contribution pension schemes, an entire generation has forgone assured pleasures today for the uncertainty of potential pleasures when they are older.

Since then, there has been so much tinkering with pensions that some people now believe it is only a matter of time before the 25 per cent tax free lump sum is curtailed.

As this is something supported by think tanks on both the left (Rowntree Foundation) and the right (Institute for Fiscal Studies) we cannot dismiss it out of hand, even though it would break the last major long-term contract between the individual and the state.

Although it might sound like an urban myth, the tax-free pension lump sum was apparently designed for British civil servants in India who wanted to retire back home in England.

The lump sum was to provide them with the cash needed to buy a bungalow rather than rent. Funnily enough, things haven’t changed that much. There are still many people who have ear-marked their lump sum to pay off the mortgage.

Specifically, the Budget contained a sentence that was the thin end of the wedge for the tax-free lump sum.

Although the LTA has been abolished, the maximum pension commencement lump sum has been ‘retained’ at £268,275 and will be frozen thereafter, which is sufficient to clear most outstanding mortgages, but the existence of the cap at such a level still represents a kick in the teeth for many. 

In a knee-jerk reaction of point scoring, the opposition Labour Party immediately stated it would reverse the abolition of the LTA.

All parties need to agree a framework for pension policy so that the public can have the confidence to commit to serious long-term financial planning, rather than, say, punting it all on a giant mortgage – as many people already do.

The UK state pension is not generous, and the entitlement age continues to be pushed back, as it does with private pensions.

Given the huge tax hikes on unsheltered dividends and capital gains (via curtailment of allowances) coming in the next two tax years, we may yet see people being given further reason to tilt their retirement savings away from boosting pensions as they are nudged towards Isas – which of course costs the state a lot less than pension tax relief. 

Isas also allow access at any time and may become the vehicle for those who want to retain some control over when and how they might ease into retirement.

The chancellor would like us to believe he is encouraging retired people back into work, but previous government pension meddling has already inadvertently sent a signal to those in their 40s and 50s that early retirement is now more desirous, because it looks increasingly harder to secure.

Pushing back pension entitlement ages is also an obvious way to reduce shrinkage of an ageing workforce, but has consequences clients and advisers which are likely to become apparent in the years to come. 

Martyn Page is the investment director at Worldwide Financial Planning