With the Chancellor this afternoon delivering a budget ‘supporting working people’ and ‘backing savers’ very few changes have been proposed… for now!
Pension tax relief changes
Following significant speculation leading up to budget day, the Chancellor finally confirmed that the industry consultation into tax relief changes had not led to a consensus. Consequently, the current tax relief regime remains in place and no changes have been proposed at this time.
The £1m lifetime allowance and £40,000 annual allowance also remain untouched and will be in force from 6 April 2016. As a reminder, those pension savers likely to breach the £1m lifetime allowance may wish to make plans to seek ‘protection’ and preserve the higher £1.25m lifetime allowance currently in place, but time is running out. If applicable, savers will need to make these arrangements before the end of the current tax year before the new, lower lifetime allowance takes effect.
For now, this is good news for an industry that has seen significant change over the past few years.
The government is to consult on introducing a Pension Advice Allowance, permitting people before the age of 55 to withdraw up to £500 tax free from their defined contribution pension to redeem against the cost of financial advice. In addition, it will also increase the existing £150 income tax and National Insurance relief for “employer-arranged” pension advice to £500.
60% of pension scheme members in England consider it to be the joint responsibility of employees and employers to ensure that employees understand their workplace pensions and are able to make informed decisions about retirement.
Source: Workplace Pensions: The Members’ Perspective *
Furthermore, it said it will also consult on introducing a single clear definition of financial advice to remove regulatory uncertainty and ensure that firms can offer consumers the help they need.
We see this as a positive step in trying to bridge the advice gap, and hope that the improved tax incentives for employer arranged pension advice encourages employers to do more to help their employees with their retirement decisions.
Related reading: “How do I prepare for my retirement?”
Introducing the “Lifetime ISA”
Many commentators report that young people in particular are not saving enough, often because they feel they have to choose between saving for their first home and saving for retirement. Those that don’t face that dilemma often find pensions too complex.
From April 2017, anyone under 40 will be able to open a Lifetime ISA, meaning for every £4,000 saved the government will add £1,000 every year until the age of 50.
The annual allowance for ISA’s is increasing from just over £15,000 to £20,000 and withdrawals from the ISA will be tax free.
Those who open a Lifetime ISA will be able to access their money at any time for a small charge. Those who have already taken out the Government’s help to buy ISAs will be able to roll it into the new lifetime ISA and keep the government savings match. This product can therefore be used as both a savings vehicle to purchase a property and a retirement savings account.
In some instances the tax benefits associated with an ISA will not be as favourable as they are with traditional pension savings i.e. higher rate tax relief for higher rate taxpayers and favourable treatment under inheritance tax rules. However, the simplicity and flexibility to draw from the ISA at any time may prove compelling for many, which could mark the end for traditional pension savings, especially if the chancellor revisits tax relief on pensions in future budgets. Savers should seek advice on which option best suits their needs before deciding which retirement savings vehicle is appropriate for them.
The Pensions Dashboard
The government has announced that it will ensure that the pensions industry designs, funds and launches a pension’s dashboard by 2019, with the intention that an individual can view all of their retirement savings in one place.
“As people work longer and change jobs more often, pension savings can become confusing. The average person will move employers 11 times over their working life, meaning they could end up with 11 or more private pensions by the time they retire. Research shows that over a third of people approaching retirement find it difficult to keep track of their pension pots.”
This follows recommendations made following the Financial Advice Market Review (FAMR) to boost member engagement.
This is not a new concept and is something the Pensions Regulator has been talking a lot about recently. Any proposal to simplify and streamline pension savings is welcomed and so today’s announcement is good news. However, its success in improving member engagement will depend on how it’s designed and delivered and so we watch with interest to see how this concept evolves.
The end for MAS
The chancellor today confirmed that the Money Advice Service (MAS), which has provided financial and debt advice to consumers since 2010, is to be abolished.
It is likely to be replaced by a smaller advice body which will work alongside The Pensions Advisory Service (TPAS) and Pension Wise. TPAS and Pension Wise will also be restructured, to ensure consumers get the financial advice they need.
* Pensions Research – Workplace Pensions: The members’ perspective, download a copy of our research, carried out by Ipsos MORI, into the views, needs and preferences of pension scheme members.
For further information on any topics raised in this update, please contact James King.