Budget 2015: Chancellor George Osborne’s ‘cost-neutral’ Budget announcement today still managed to herald further changes to the pensions landscape, including plans for a secondary annuities market and a hefty 20 per cent cut to the lifetime allowance.
In a move to extend the pension flexibilities, the government announced that it would launch a consultation to allow around 5m annuitants to cash in their products for a lump sum, while a reduction in the lifetime allowance on pensions savings to £1m down from £1.25m had been rumoured ahead of the Budget.
Secondhand annuities
Osborne said in his speech: “For many, an annuity is the right product, but for some it makes sense to access their annuity now. So we’re changing the law to make that possible.”
The changes are tabled to come into play next year. Gareth Connolly, chair of the pensions board at the Institute and Faculty of Actuaries, said while the body welcomes the consultation to give pension savers further flexibility, it would prefer if any further changes were delayed until “way after” the current round of reforms have bedded in.
“I would hope that is conditional on the April 2015 changes being implemented in a way that’s robust,” he said.
Building in adequate protections for consumers is an essential prerequisite to such a scheme getting off the ground
Bob Scott, LCP
Bob Scott, senior partner at consultancy LCP, said the move smacks of “pure electioneering”.
“It is designed to appeal to those holders who have been forced to buy an annuity they didn’t want. In many cases, they may be keen to release the remainder of their pot,” Scott said. “Throw in the risk of fraudsters targeting vulnerable people and the potential for a mis-selling scandal is high.”
He added: “Building in adequate protections for consumers is an essential prerequisite to such a scheme getting off the ground.”
Lifetime allowance
The cut to the lifetime allowance by a fifth would create government savings of £600m a year, Osborne said.
However, from 2018, the new £1m allowance will be indexed in line with the consumer price index to protect the value of savers’ LTA against inflation for the first time.
This is Osborne’s third cut to LTA during his tenure, which has steadily been trimmed from £1.8m during the coalition’s term.
Jackie Holmes, senior consultant at Towers Watson, said the reduction was not a good move but welcomed the news that the allowance would at least be indexed.
“The devil is in the detail, as usual, to see what protections are in place and how that indexation is going to work,” said Holmes.
And the rest…
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The chancellor also announced an increase to the income tax personal allowance to £10,800 in 2016-17 and £11,000 in 2017-18. This is up from £10,600 in 2015-16.
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“It’s a tax cut for 27m people and means we’ve taken almost 4m of the lowest paid out of income tax altogether,” Osborne said in his Budget speech.
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The threshold for paying 40 per cent income tax will rise to £43,300 by 2017-18, from £42,385 this year.
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The government will also look to reform certain national insurance contributions that affect the self-employed. In addition, NI contributions for under-21s will be abolished.
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The Budget speech unveiled a new “flexible Isa”, available from this autumn, that allows people to withdraw money and deposit in the same tax year without losing their tax-free entitlement.
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Help-to-buy Isas will also be introduced in the autumn, providing a 25 per cent government top-up on deposits for first-time buyers, up to a total sum of £15,000 all in.
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In two weeks’ time corporation tax will be cut to 20 per cent. The main rate of corporation tax is currently 21 per cent.
“Interestingly, the chancellor was saying it’s only going to affect 4 per cent of those approaching retirement but I guess that doesn’t feed-in all the people that will be coming through depending on how the indexation works,” she added.
Chris Noon, partner at consultancy Hymans Robertson, said the cut was too blunt an instrument and would disproportionately impact defined contribution savers.
“For DB people it’s not that bad; the government use a 20-to-one conversion factor which gives a pension of £50,000 – it’s a pretty high pension. You’d have to have a salary of £80k-£100k to be hit by the lifetime allowance,” he said.
Noon added that while £1m for a DC member may sound like a lot, it would generate a pension income of around £30,000.
However, Noon said the government’s previous LTA reductions had prepared “a well-trodden path” for schemes and employers to communicate the impact of the changes to members and make the necessary changes to benefit statements, modellers and other administrative systems.
Speculation prior to the Budget announcement also predicted changes to the annual allowance, but the chancellor strongly rebuffed this measure.
“We have had representations that we should also restrict the annual allowance for pensions and use the money to cut tuition fees,” Osborne said.
“I have examined this proposal. Such a policy is neither progressive nor fair and I won’t do it.”
