BudgetFeb 22 2021

‘Less change is good’: What advisers want from the Budget

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‘Less change is good’: What advisers want from the Budget

As the Chancellor prepares to give his Budget next week, amidst the ongoing pandemic, advisers have warned now is not the time for big overhauls but instead for tweaks to annual allowances and solutions for long-running pensions issues.

Advisers have said Chancellor Rishi Sunak should hold off on making any radical changes to pensions and should instead look at ways to pay back the increasing bill for the government’s Covid support measures, while giving the economy more time to recover.

However, advisers do want to see the scrapping and tweaking of certain allowances to stop penalising certain people for saving into a pension.

They have also called on the chancellor to once and for all fix the ongoing net pay anomaly to help those on low incomes.

Lifetime allowance

Rebecca Aldridge, managing director of Balance Wealth Planning, has called for the lifetime allowance to be removed altogether.

The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge. 

For the 2020-21 tax year it is set at £1,073,100.

Victor Sacks, director of advice firm VS Associates, believes this tax rule is unfairly penalising individuals and also thinks the government should remove it.

He said: “I just can't see why it’s there, other than to further punish those who in my opinion already pay more tax in one year than most of us will pay in 10.”

But Fiona Tait, technical director at Intelligent Pensions, said the government could look to reduce the lifetime allowance, as well as the annual allowance as a way to pay off some of the Covid debts.

But she admitted this in itself would not be enough to offset these debts and the government “may want to wait and go for a more comprehensive solution”.

Tax relief

Another way Sunak could boost tax receipts is to reform pensions tax relief.

Suggestions about moving to a flat rate of relief has been swirling around the rumour mill for some time, although no chancellor has been brave enough to make any changes thus far.

Tim Morris, independent financial adviser at Russell & Co, said: “A large saving to the £40bn annual tax relief bill would certainly chip away at some of the mind boggling debt levels the Covid-19 pandemic stimulus has created. 

“Whilst a flat rate of tax relief has been talked about for years, it appears difficult to implement. 

“I only hope they don’t just scrap higher rate relief altogether. That would kill the attraction of pensions for most.”

Steven Cameron, pensions director at Aegon, agreed moving to a flat rate of relief would be complex to implement, particularly for defined benefit schemes.

Cameron said: “There are also issues around salary sacrifice – measures would need to be put in place to avoid higher rate taxpayers effectively retaining higher rate relief by reclassifying their employee contributions as employer contributions. 

“We do see there as being a heightened likelihood of a move to a flat rate, but more likely in a November Budget than as soon as March.
 
He added: “If we do see a move to a flat rate of say 25 per cent, higher rate taxpayers will be receiving less generous top-ups and we’d argue this reduces or potentially removes the need for the annual and lifetime allowances.”

Net pay anomaly

It is expected that the government will look to address the net pay anomaly sooner rather than later, especially as it was included in the Conservative manifesto.

Members of pension schemes who don't pay income tax are granted basic rate tax relief of 20 per cent on pension contributions up to £2,880 a year.

In practice this means HM Revenue & Customs will top up a net contribution of £2,880 to a gross £3,600.

But this tax relief is only available where the pension scheme operates on a relief-at-source basis, which is only accessible through a handful of companies.

It is not available for schemes that operate a net pay arrangement, which are the majority of pension funds in the market.

The difference between these two arrangements has become more noticeable since the income tax personal allowance increased to £12,500, which is above the auto-enrolment minimum threshold of £10,000.

Morris said this issue needs addressing as it is an “injustice” that lower earners can miss out on tax relief.

He said: “They may as well invest in an Isa instead. There is also talk of higher rate taxpayers not having to reclaim the extra tax relief. If so, moving universally to relief at source would make sense for all.”

But Tait said Covid is likely to remain the priority so the government may want to avoid making any fundamental changes to unrelated areas in this Budget.

Avoid pensions

Many across the industry have urged the chancellor to avoid touching pensions during this Budget as the industry is still playing catch up to various regulatory changes which have been made over the past years.

Raj Mody, global head of pensions at PwC, said: "Despite pressures on the chancellor to start recovering revenues to pay for pandemic borrowing, now would not be the time to go after pensions. 

“The pensions industry is already under strain from having to keep up with a regulatory backlog, even before the disruption of Covid-19 hit, and the burden of other new legal developments.”

However, Mody said it would be a welcome step if the chancellor looked to level up pension saving opportunities between the employed and self-employed.

Mody said: “The furlough and self-employed support schemes have highlighted a long-standing challenge around how different groups of workers are treated as part of our overall tax system.

“Another ongoing concern is how the self-employed are left out of the auto-enrolment savings system, which allows employed workers to benefit from company top-up contributions.”

amy.austin@ft.com

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