Pensions tax relief and the triple lock have once again been spared by the chancellor, although changes to these costly policies are expected down the line.
In a spend-heavy economic statement, chancellor Rishi Sunak chose not to mention how the government would pay for its VAT and stamp duty cut, among other announcements, in a move which saw the triple lock and tax relief protected.
The triple lock
There was speculation from the industry that the chancellor would look to either scrap or reform the pensions triple lock to remove the earnings link to mitigate any extraordinary rises that may occur as a result of coronavirus and pay off any debts.
Under current rules, the state pension is increased by the triple lock which is the highest of earnings growth, price inflation or 2.5 per cent a year.
As inflation is low at the moment, a mere 0.5 per cent in May, the state pension is likely to be increased by a minimum of 2.5 per cent or earnings growth.
And as a result of the furlough scheme there could be a sharp decline in average earnings this year followed by a quick and full recovery in the next causing a double digit increase in 2022.
Steven Cameron, pensions director at Aegon, said continuing to “blindly” follow this formula as the country moves past coronavirus could “create bizarre results which were never intended and which would fail any test of intergenerational fairness”.
Mr Cameron said: “The chancellor will have to make a call as to whether to suspend the earnings related element, adjust it to smooth out sharp fluctuations or to make a more fundamental change, with some people viewing it as overly generous.
“But after prioritising younger generations in this summer statement, the chancellor will have a careful balancing act to perform to sell changes to state pensions to older generations.”
Pensions tax relief
The chancellor also remained silent on whether he was looking at reforms to the pensions tax relief system.
When paying into a pension savers receive tax relief on any contributions they make and under the current system tax relief is paid at the highest rate of income tax any saver pays.
This system costs the Treasury almost £40bn a year in lost income tax revenue, which could be used to pay off the government's increasing Covid-19 support debt.
Earlier this year (February 10), it was reported that former chancellor Sajid Javd was looking to make the system fairer for those on lower incomes, by cutting high earner's relief to 20 per cent.
There could also be a revival of the old debate around introducing a 30 per cent flat rate of tax relief or turning the system on its head so relief is given at point of withdrawal.
Autumn Budget
It is expected that these policies will not get off so freely in the Autumn Budget with Jon Greer, head of retirement policy at Quilter, claiming that maintaining the triple lock in its current form was “simply not an option”.
Mr Greer said: “In the autumn, the government are likely to make a change to the triple lock and could temporarily amend the triple lock by uprating the state pension based on the higher of 2.5 per cent, inflation or five-year rolling average wage growth.
"This will smooth any abnormal wage effects whilst protecting real incomes and saving the government a considerable amount each year.
“The government should use this opportunity to carefully consider the merits of moving to a long-term solution, such as a smoothed earnings link, so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness.”
The government looks as though it is "putting off the bad news until later in the year", according to Tom Selby, senior analyst at AJ Bell.
He said: "The chancellor was clear stabilising the public finances and paying off the estimated £300bn bill racked up during the pandemic will be a key priority in his Autumn Budget.
"The choice facing the government is simple, if unpalatable: retain the triple-lock and gouge an even bigger hole into the Treasury’s balance sheet, or abandon the policy – perhaps temporarily – and hope those affected will forgive them.”
Andrew Tully, technical director at Canada Life, agreed that the Autumn Budget was where there will be more focus around spending plans for future years.
He said: “Far from being kicked into the long grass, that is likely to be where we see at least temporary changes to the state pension triple lock. The government may also look again at pension tax relief although the difficulty in implementing change in a simple, straightforward manner continues to be a significant issue.”
Meanwhile, Alistair McQueen, head of savings and retirement at Aviva, applauded Mr Sunak for leaving pensions alone in his statement so as to not panic savers at such a volatile time.
Mr McQueen said: “With so much uncertainty, today was not the day to panic on pensions. We’ve been encouraging pension savers not to panic and to focus on the longer term. It’s good to see the chancellor has also followed this course of action.
“For our industry, all eyes now turn to the autumn budget. The chancellor signalled this is when he hopes to begin balancing the books. As to how he should move, it’s premature to say. But not even the chancellor knows where the economy, or the coronavirus, will be in four months.”
amy.austin@ft.com
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