The future of the triple lock on state pensions, the tax relief system and defined benefit schemes have all been called into question by the vote to leave the European Union.
At the last Budget Chancellor George Osborne pulled back from radical reform of the pension tax relief system. It was widely assumed he dropped the policy because the Government did not want it to impact on the referendum.
The Chancellor said there would be an emergency Budget if the UK voted for Brexit.
Tax relief reform back on the table?
Osborne’s position is now uncertain and the Government may not have the appetite for complicated reform at the same time as negotiating an exit.
Pinsent Masons head of pensions Robin Ellison says: “It is the Treasury’s pensions policy, not Osborne’s, so the Department will push on for reform because they need the money.”
AJ Bell senior analyst Tom Selby says: “This could see the future of pension tax relief – which was open to review prior to the referendum – once again thrown into doubt.
“Pension tax relief costs the Exchequer an estimated £34bn a year, so drastically slashing this incentive will be deeply tempting for a Government desperate to raise cash if, as many have predicted, the economy heads into a tailspin.”
Ellison adds the uncertainty over the UK’s future will put a block on other Government initiatives, raising doubts over whether the secondary annuity market will launched as planned in April 2017.
Advisers and industry have been wary of pledging their support for the proposals as four separate Government and FCA consultations were launched in recent weeks.
Pain for DB schemes
Defined benefit schemes could also be hit, warns Hargreaves Lansdown head of retirement policy Tom McPhail.
He points out annuity rates have sunk even lower and entered “uncharted territory”, having the effect of pushing up DB liabilities. DB schemes were already under the spotlight following the collapse of BHS and spiralling funding shortfalls, which could push the Government into intervening.
McPhail says: “Final salary scheme sponsors and trustees should brace themselves for some unwelcome news on scheme valuations. If these numbers feed through into scheme liabilities it could exacerbate the deficits which already exist in many schemes.
“Investors planning to buy an annuity might want to get their skates on; if these numbers feed through into annuity rates I’d expect to see them fall.”
Ellison adds the FCA and The Pensions Regulator may “seize the opportunity” of the UK’s exit to simplify the regulatory framework.
Pensions and Lifetime Savings Association chief executive Joanne Segars says: “Much will depend on the precise nature of our future relationship with the EU, which may mean some aspects of UK pension provision continue to be influenced by the EU. In other areas, UK pension law may need to be disentangled from EU legislation.
How safe is the state pension?
Osborne and David Cameron warned prior to the vote that the triple lock on state pension increases would be under threat if the Government was forced to raise extra cash in the event of Brexit.
However, former pensions minister now director of policy at Royal London Steve Webb says any cash raising measures were unlikely to fall on the most powerful voting bloc in the country.
But he added “strong pensions depend on a strong economy”, noting the impact on markets this morning.
Selby adds there could be “severe implications” for around half a million British expats who have retired in Europe.
He says: “At the moment, state pensions for those living in the EU are uprated in line with the triple lock. However, leaving the EU casts doubt on whether this valuable benefit will continue as the UK may need to strike individual deals with each member state – presuming the Government doesn’t remove it altogether.
“Our analysis suggests a 65-year-old retiring on the flat-rate state pension of £155.65 a week would miss out on at least £50,000 of income over 20 years without the triple lock.”
The last Budget also set in train a new Pensions Bill with plans to beef up regulations on master trusts.
However, none of the pensions experts Money Marketing spoke to suggested the Leave result would halt the Bill’s passing through Parliament.