The 2015 Summer Budget has delivered a series of blows to pensions in the UK. The Chancellor of the Exchequer claims that “the government is committed to supporting savers at all stages of their lives to help them secure a better financial future for themselves and their family”. Some of the measures that the Chancellor has introduced in the past have been supportive of saving, particularly via the ISA route, but pensions seems to be a special case. The ‘freedom and choice’ changes introduced in the 2014 Budget created positive interest in pensions but, in reality, made little tangible difference for most savers. Some of the tax changes made later in 2014 served to address historic distortions in the treatment of unused pension benefits on death rather than create favourable treatment for these savings.
The announcement in the Summer Budget of the consultation into pensions tax relief has created immediate uncertainty around a key driver of pension saving, namely the tax relief provided on contributions. It has proved difficult enough to get earners to defer a portion of their current income for consumption in later life, ultimately reducing reliance on the State to support impoverished senior citizens, with this incentive in place. How much more difficult would this task become without the tax relief carrot? The current tax relief system is complex and inequitable, favouring those with a defined benefit pension over those with defined contribution provision, so the consultation does represent an opportunity to make a positive long-term difference.
The Office of Tax Simplification (“OTS”) is to be established on a permanent basis with an expanded role and capacity in parallel with, but independent of, the consultation. The OTS will find much opportunity in the pensions realm, with a further complication added by the Summer Budget in the form of the reduction Annual Allowance (“AA”) for those earning over £150,000 p.a., including pension contributions. The complication results from the need to fund an unrelated tax concession! Those affected will see their AA reduced by £1 for each £2 earned until the AA reaches £10,000 p.a. (for those earning £210,000 p.a. and above). Those earning over £210,000 p.a. suffer no further penalty nor gain any further opportunity for tax relief. This measure seems to be at odds with two more of the Government’s stated goals: wanting to reward work by reducing taxes (the effective marginal tax rate for those earning £150-210,000 p.a. and making full use of pensions tax relief rises to 67.5%); and aiming to have a tax system that is simple to understand and easy to comply with.
A consultation on creating a secondary annuity market was published alongside the March 2015 Budget. That consultation’s outcome has not been formally published but the result seems to have been decided with the confirmation in this Summer Budget that the implementation of the secondary market has been delayed until 2017. Further plans, and hopefully consideration of some of the consequences, in this regard are to be announced in the autumn.
The Summer Budget does contain some good pensions-related news too. Access to Pension Wise, the free and impartial guidance service, is to be extended to those aged 50 and above. The Government also indicated its intent to consult on options aimed at making the process for transferring pensions from one scheme to another quicker and smoother.
The Chancellor forecasts that additional (year on year) public sector borrowing is to be eliminated by 2020. Staunching the growth of the National Debt, if only the on-balance sheet portion, would be a welcome development. A consequence of this development is a likely reduction in the level of issuance of Government Bonds. This likely reduction comes as the UK defined benefit pension scheme market continues on its path of run-off, with a corresponding appetite for such instruments. Shrinking supply, particularly at a time of growing demand, is likely to put pressure on yields.
The current Government has repeatedly emphasised the need for long-term, responsible planning. These words have often been backed up with action. Its actions with respect to pensions seem to be at odds with this general approach though. The freedom and choice regime as well as the creation of a secondary market for annuities undermines the long-term nature of pension saving. The current consultation on pension tax relief might have similar consequences. These measures will increase short-term tax receipts albeit at the expense of long-term personal financial security of the UK population, particularly those making private provision for later life. The uncertainty that these changes, both actual and mooted, are creating in the short-term is undermining pension-related saving by individuals and investment by providers, too. What will it take to get Government to take a long-term view of provision for later life, with corresponding incentives and regulatory stability?