Royal London’s Sir Steve Webb unpicks the Spring Budget and explains what else we can expect that could have an effect on pensions.
With the lifetime and annual allowances for pension tax relief having been repeatedly cut in recent years, there was always the risk of further ‘salami-slicing’.
While the chancellor ruled out any form of ‘death tax’, his green paper could include the notion of a dedicated ‘care Isa’, or looking at the idea of hybrid pension/care products that could attract favourable tax treatment
Instead the only mention in the Budget documents of pension tax relief was confirmation that the proposed cut in the money purchase annual allowance would be going ahead from April 6 2017.
I was rather surprised when this measure was first floated in the 2016 Autumn Statement. Given that the consultation document which followed the announcement provided no evidence that there was a big problem with tax ‘recycling’ to be tackled, it was hard to understand why the MPAA deserved a mention in chancellor Philip Hammond’s first big fiscal statement.
The cut was widely opposed, mainly because it makes it harder for people who have had to dip into their pension pots to start rebuilding them later in life. But the Treasury seems to have ignored all of the consultation responses and gone ahead in any case.
The other main revenue-raising measure of relevance to pensions was the new 25 per cent tax charge on certain transfers into qualifying recognised overseas pension schemes, a measure expected to raise £60m to £65m a year from 2017-18 onwards.
The government argues this change is necessary to prevent people who have received tax relief on their pension contributions then moving their pension pot overseas with a view to reducing their tax liability. The Treasury says there will be exceptions for those who have ‘a genuine need’ to transfer their pension, as well as for transfers within the European Economic Area.
The knock-on effect
Other changes announced in the Budget could have knock-on effects on the world of pensions and savings. A high-profile change was the cut in the tax allowance for dividends from £5,000 to £2,000 from April 2018.
Given that the tax allowance has only been in place for a year, this level of instability and unpredictability is not something that will give much confidence to savers. It may, however, increase the attractiveness of holding equities within more tax-advantaged wrappers.
The increase in national insurance contributions for the self-employed is in effect a consequence of pension changes that have already been made. Before April 2016, one of the justifications for a lower rate of NICs for the self-employed was that they were only building up entitlement to the basic state pension and not to the state earnings-related pension.
However, with the advent of the new single-tier state pension, all NICs deliver exactly the same amount of state pension entitlement. This means the self-employed have had a windfall gain from the introduction of the new state pension.
They were set to gain further by the abolition of the small weekly class 2 rate of NICs in 2018-19. Against this backdrop, it is quite hard to argue that the proposed increase of 1 per cent in the rate of class 4 NICs from 2018-19 and a similar increase from 2019-20 are excessive, though political pressure may lead the chancellor to offer the self-employed something else in return.
Spring Budget focus on self-employed lets industry hope for more
The chancellor’s focus on the self-employed could pave the way for bringing the group into the pension system, some experts have said, as the spring Budget brings no significant news on pensions.
Hammond also used his Budget statement to flag a forthcoming green paper on the long-term funding of social care, and we may find that pension-related options are considered as part of that consultation.
While the chancellor ruled out any form of ‘death tax’, his green paper could include the notion of a dedicated ‘care Isa’, or looking at the idea of hybrid pension/care products that could attract favourable tax treatment.
Finally, the Budget economic forecasts showed that average earnings growth is likely to be at 3 per cent or more for each year from 2017 to 2021. As a result, the triple lock policy (which puts a 2.5 per cent floor under increases) will effectively cost the government nothing for those years. This probably reduces the chance of it being scrapped any time soon.
Sir Steve Webb is director of policy at Royal London
