Last week’s Autumn Statement was, by the standards set by George Osborne, pretty mundane.
However, hidden in the speech, and the raft of documents issued by the Treasury afterwards, were subtle indications of where Government pension policy may head over the next few years.
The changes, if they happen, could have a significant impact on your retirement and potentially cost you dearly.
The triple lock was introduced in 2010 and guarantees that the basic State Pension will rise in line with earnings, inflation, as measured by the Consumer Prices Index (CPI) or 2.5%, whichever is higher.
It meant that the Basic State Pension rose by 2.9% in April 2016; well above wage growth for employees. The Government’s own Actuary Department believes the policy cost £6 billion last year
In the weeks leading up to the Autumn Statement, pressure on the Chancellor to change it grew, with the Work and Pensions Committee saying that the triple lock was “unsustainable” and “unfair” on younger families. Furthermore, prominent Conservative politicians, such as Iain Duncan-Smith, Lord Willetts and Stephen Crabb, all former members of the Cabinet, suggested that the policy should be scrapped or amended to reduce the soaring cost.
Pensioners would have been relieved to hear Philip Hammond announce, in his Autumn Statement, that the triple lock would stay until the end of this Parliament, in 2020. However, he went on to say: “But as we look ahead to the next Parliament, we will need to ensure that we tackle the challenges of rising longevity and fiscal sustainability, and so the Government will review public spending priorities and other commitments for the next parliament in light of the evolving fiscal position at the next Spending Review.”
Many experts took this as a clear indication that the days of the triple lock, in its current form at least, are numbered.
Whilst we believe it is highly unlikely that increases to the Basic State Pension will ever fall behind the rate of inflation, they days of a guaranteed rise, well above wage inflation, seem to be numbered.
The system of tax-relief is one of the key advantages of using a pension, as opposed to other alternatives such as ISAs (Individual Savings Accounts), to save for your retirement.
Put simply, it means that for every £80 paid into a pension, a basic rate taxpayer (20%) receives an additional £20; taking the ‘gross’ contribution to £100. A higher rate taxpayer (40%), can claim back a further £20, resulting in a ‘net’ cost of £60 to see £100 added to their pension.
The system is undoubtedly popular; however, it is hugely expensive, costing the Government £48 billion in 2014/15. The system also disproportionately benefits higher rate taxpayers, with 2/3rds of all tax-relief, some £32 billion, being paid to this, more wealthy group of savers.
Despite the Treasury saying there are no current plans to reform pension taxation, one of the more obscure documents issues to support the Autumn Statement hinted at possible changes to the system of pension tax-relief.
The consultation document entitled: ‘Reducing the money purchase annual allowance’ said:
“Minimum contribution rates under automatic enrolment (currently 2%) are due to increase to 5% in 2018 and 8% in 2019. There is also a review of automatic enrolment due to commence in 2017. As more people become pension savers for the first time and as automatic enrolment contribution rates increase, the cost of income tax and National Insurance contributions relief will increase. The government is committed to enabling individuals to save more so that they have security in retirement, but it is important that resources focus where there is most need.”
Many pension experts believe this is a clear hint that the days of higher rate tax-relief, in its current form at least, could be numbered.
The Government has several options.
It could move to a system of flat rate tax-relief, which would see everyone, no matter of their tax rate, get the same benefit. Supporters of this option suggest the rate could be set at, for example, around 25%, to reward basic rate taxpayers, but still give higher rate taxpayers, some, albeit a lower, incentive to pay into their pension.
The Government may decide to opt for an age based system, where the level of tax relief paid, and potentially the amount you can contribute to your pension, rises as you get older.
The simplest solution, generating the largest immediate saving, would of course be to scrap higher rate tax-relief altogether, leaving the arrangements for basic rate taxpayers unchanged. This would be a massive change though, affecting millions of higher rate taxpayers, and may be a step too far.
Finally, the Government may opt to make no changes whatsoever; although in the face of the mounting cost, we believe this to be unlikely.
We are here to help
All of this is of course just speculation, but it doesn’t make pension planning any easier.
We are here to help, if you would like more information about the possible changes, and how best to plan for them, please call us on 0115 933 8433 and ask for Bev or Sarah.