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Autumn Statement 2012: Are pensions in the firing line again?

George Osborne 480

Chancellor George Osborne will deliver his third Autumn Statement on Wednesday and speculation is once again rife that he plans to wield his axe on pension tax relief.

But before we get to the ‘will he, won’t he?’ cut the annual allowance question, it is worth establishing the facts.

The Liberal Democrat position, set out in the party’s manifesto, is clear – scrap higher-rate tax relief altogether in order to pay for an increase in the income tax threshold to £10,000.

Labour, meanwhile, wants the Government to review the entire pension tax relief system and look at redistributing some of the estimated £20bn it spends each year trying to incentivise people to put money into a pension scheme.

The Conservatives make no specific mention of pension tax relief in their 2010 manifesto. However, as the lead partner in a coalition Government, the party has already overseen a cut in the annual allowance for tax-incentivised pension saving from £255,000 to £50,000.

The big question now is – will Osborne cut the annual allowance again?

His refusal to answer that question on the Andrew Marr Show on BBC1 this weekend – having categorically ruled out a mansion tax moments earlier – could be seen as an indication that a decision to reduce the annual allowance has already been taken.

It is also worth remembering that the Treasury caught the industry off guard when it set the revised annual allowance at £50,000 in April 2011, with most expecting it would lower the cap to somewhere between £30,000 and £45,000 a year.

By setting the bar higher, the chancellor left himself £20,000 of wriggle room which the Conservatives could use as a bargaining chip with their Liberal Democrat coalition partners when negotiating future cuts elsewhere.

Osborne may now be ready to cash his chip in on Wednesday in order to balance a planned £10bn cut in welfare spending.

Of course, we have been here before. Just 10 months ago, in the weeks preceding the March Budget, reports surfaced suggesting the chancellor was planning to limit pension tax relief by reducing the annual allowance or scrapping higher rate relief altogether.

Nothing materialised then and it is not beyond the realms of possibility that nothing will materialise this time round either.

It is certainly not a decision without political risk. Experts have warned a cut in the annual allowance will hit public sector workers, who tend to receive large employer contributions in defined-benefit schemes, and entrepreneurs, who often make a few large contributions into their pension rather than regular, smaller payments.

But with a mansion tax ruled out, and between £600m and £2bn a year to be saved by cutting the annual allowance, it may be a risk the chancellor is willing to take.

The Autumn Statement could also provide some help for savers in capped drawdown who have seen their retirement incomes plummet on the back of falling gilt yields and a reduction in the maximum amount they can take each year.

Officials from HMRC have met with industry representatives in recent weeks to discuss the issues facing drawdown savers and possible solutions.

The Association of British Insurers, for example, has proposed changing the way the GAD maximum is calculated by using a mixture of long-term corporate bond yields and long-term gilt yields, rather than the 15-year gilt yield currently used.

Insurers say this would better reflect the price of a single-life annuity on the open market and could increase the maximum income available to drawdown savers by between 6 per cent and 12 per cent.

The ABI believes implementing its proposal would only require a change in GAD calculation guidelines, rather than time-consuming legislative reform, and so could provide a quick win for the chancellor this Wednesday.

Osborne could also use his Autumn Statement to launch a more fundamental review into the way the drawdown regime works. A J Bell has consistently called for a policy review to determine whether “slavishly following gilt yields and actuarial principles” remains the most appropriate way to set drawdown limits.

The final obvious outstanding piece of pensions business which the chancellor could address is the delayed white paper detailing plans to introduce a flat-rate state pension worth £140 a week for future retirees.

In March’s Budget, Osborne said further details on the proposal would be published in the spring.

In a written statement published in July, however, pensions minister Steve Webb said the “scale, complexity and importance” of the changes meant the white paper would be delayed until the autumn.

For those of you who are interested, autumn ends on 20 December. So while sources say the white paper is unlikely to be unveiled on Wednesday, its publication should be in very short order.


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. It’s not even the headline allowance that is the issue. For me it is the message that it sends out to the wider public that retirement plannning, of which pensions are a fundamental facet are something that can be neglected in order meet short term priorities.

  2. Once again pensions are being used as a political football.

    And they wonder why the public have such a negative opinion of them.

    I never thought that the Conservative party would buy into the politics of envy espouse by Labour and the LibDems.

    I wonder if the suggested new rules, if they come in, will apply to MP’s and senior civil servants? If they dont this is clearly unacceptable and is an attack on private sector workers!

  3. You really couldn’t make this stuff up.

    Everyone make sure you save for your retirement but we will make it more difficult for you do so, without warning, at regular intervals.


  4. All we can do as IFAs is take care of our clients best interests, this was demonstrated to me recently when one of my clients decided to retire early, had he not been advised (by his former adviser) to invest in a personal pension, he would not be able to retire until he reached 68.

    In the brave new post RDR cock up world the FSA and of course the Chancellor who ultimately bears responsibility for the mess our industry is in, those of us who remain in the industry must gird our loins, bear up, bear down and ensure that clients are always the focus of our attention, without them, we have no business of any worth and without us, the FSA/FCA will have no fee payers to support their excessive spending and of course to make up the deficit in their own pension schemes.

    Not a good start to the new year.

  5. It’s probably fair to say that pensions are now dead as a form of retirement savings for normal basic rate taxpayers.

    The tax relief given on entry is clawed back on payment and the rules surrounding payment are now too complex. Which of us would bet our mortgage on tax free cash (as I still insist on calling it) being untouched in future? Unisex annuity rates make these even less attractive for men.

    What basic rate taxpayer can afford to put away more than the annual ISA allowance anyway? An ISA is much better place to save, much the same tax treatment and fewer silly rules.

    Pensions are for the rich, self employed and business owners only.

    What a mess the governments of the past 20 years have made of what was once the best retirement savings system of anywhere in the world. More meddling today won’t hep.

  6. There is no reason for a basic rate taxpayer to save in a personal or money purchase pension scheme (unless there are employer contributions). Tax relief on contributions, fine, but they keep 75% of a person’s savings and allow a trickle of taxed income (assuming non-qualification for flexible drawdown). In view of this there should be an amnesty. Let people who have invested in these ridiculous savings plans have their money back.

  7. The Government has just forced thousands of employees to join NEST.

    What message will another attack on pensions say to these people?

    If they haven’t already opted out then I’m sure they will after Wednesday if pensions are fiddled with again.

    The message to all in NEST wiil be you can’t trust governments to leave you pension alone for 1 year let alone for 25 years plus. Dont risk it, you are better off out NEST

  8. well there is a surprise ! its an easy target. is it just a coincidience that the GAD have not yet confirmed if the scheme pays the AA charge how it will be applied in practice for the NHS and other statutory schemes? Bearing in mind the 31/01/2013 is fast approacing and most Gps who have a problem dont know about it how are they supposed to make a decision. a happy days !

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