Analysis: Industry experts anticipate further changes to pensions in the emergency Budget and have expressed concerns over the longer-term impact on the UK’s retirement savings culture.
With just less than a month to go until chancellor George Osborne’s emergency Budget, experts from across the industry have been discussing what could be in the pipeline for pensions.
The Conservative party gave away some clues as to what July 8 might bring, in its pre-election manifesto.
Ahead of its shock election victory in May, the party put forward plans to fund an increase of the inheritance tax threshold to £1m through a reduction in tax relief on pension contributions for people earning more than £150,000.
It also assured voters of a minimum 2.5 per cent annual increase of the basic state pension under the triple lock.
Moving goal posts
Steve Simkins, head of public sector pensions at consultancy KPMG, gave an example that demonstrates how public servants earning less than £100,000 could be impacted by the lifetime allowance, the annual allowance and the removal of the highest rate of pensions tax relief.
The example is based on the assumption that the Conservative party follows its manifesto plans and includes the whole pension value in the earnings test.
A 50-year-old doctor earning £90,000 who gets a 10 per cent pay rise could pay £4,000 extra tax as a result of the removal of the highest rate of pensions tax relief. This is in addition to a tax charge of £13,000 because he exceeds the annual allowance.
The value of his pension accrual over the year is £72,000;
His earnings to count towards the new annual allowance test are £99,000 + £72,000 = £171,000;
Under current rules he is £32,000 over the current annual allowance;
He will also exceed the lifetime allowance now it has been reduced from £1.25m to £1m;
Reduced annual allowance will be £30,000.
Public sector hit
Steve Simkins, head of public sector pensions at consultancy KPMG, said it was likely the annual value accrued in a defined benefit pension would be included within the £150k cap for the higher rate of pensions tax relief.
“The headline is that all public servants over £80,000 are likely to be impacted by the loss of highest rate pensions tax relief,” he said.
Simkins said that if implemented, the earnings measure would come as a shock to many in the pensions industry.
“It’s going to be a mechanism, either intentional or otherwise, of reigning back the pensions of higher-earning public servants,” he said, adding: “It raises the spectre really of the next round of public sector reform being through pensions tax changes and not through direct benefit change… pensions reform via the back door.”
Eleventh-hour change
Tom McPhail, head of pensions research at platform provider Hargreaves Lansdown, said the proposed changes would bring additional complexity to an already complex system and were a real cause for concern within the industry.
He said: “It really feels like the announcement of the reduced lifetime allowance was perhaps the straw that broke the camel’s back.
“I’m now hearing many scheme managers, and human resources managers expressing concern about the number of people who will be hit by the LTA.”
I wouldn’t rule out the possibility of seeing something more fundamental than simply tinkering with the 45 per cent
Tom McPhail, Hargreaves Lansdown
However, McPhail said there was the potential for an eleventh-hour change of direction.
“I wouldn’t rule out the possibility of seeing something more fundamental than simply tinkering with the 45 per cent,” he said.
Under pressure
The government’s five-year ban on income tax, VAT and national insurance increases, unveiled in the Queen’s speech last month, has reduced its scope for funding ambitious plans in this parliament.
Malcolm McLean, senior consultant at Barnett Waddingham, said: “The shortage of money might drive [the government] to do a number of things that have been hinted at in the past but never quite got round to,” he said.
McLean said changes could include:
• a move to a standard rate of tax relief across all pension savings;
• a merger of tax and NI contributions;
• the introduction of a charge cap on funds in the decumulation phase.
McLean said a merger of NI and tax contributions could drive significant administrative cost-savings, and a post-retirement charge cap would be high on pensions minister Ros Altmann’s agenda.
“I wouldn’t rule out the possibility of further reductions in the annual allowance – to what, I don’t know,” said McLean.
Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said the chancellor “has form” for coming up with Budget surprises.
“It’s a full term until the next election, which does give him some electoral freedom,” said Nolan.
“Anything he does now that upsets people will have been forgotten by the next election. The constant tinkering and changing of rules takes away people’s incentive to act prudently and save money.”
