The pensions industry has given the Autumn Budget a cool reaction, with criticism over a lack of measures to help savers.
In a statement dominated by housing and Brexit, Chancellor Philip Hammond used the Budget to paint a picture of an economy still paying down the debt, helping struggling renters, and ready for life outside the EU.
However, others were glad to see no radical reform to pensions or savings, arguing that “no news is good news” this time around.
The key measures
At a glance, first-time buyers were the main winners from the Budget with stamp duty on houses up to £300,000 abolished immediately. Economic growth fared less well: 2017’s forecast dived by half a percentage point to 1.5 per cent as productivity growth also dipped. £3bn has been set aside for Brexit contingency planning.
On personal finances, there was an increase in the tax-free income allowance to £11,850 and an increase in the higher-rate tax threshold to £46,350, building on previous Budget announcements.
Hammond had already pledged to increase the personal allowance before income tax kicks in to £12,500 from £11,500 by 2020. The point at which the higher rate threshold kicks in was also set to increase to £50,000 by 2020.
But savers will see little respite from the squeeze on wallets. There will be no increase in the Isa savings limit, for example. Rising inflation combined with escalating auto-enrolment contributions will add to the squeeze. There was scarcely any mention of pensions throughout the whole speech. A small number will actually see their pension contributions fall as they are moved out of the higher-rate tax thresholds and receive Government top-ups only at the basic rate.
There is a little help for pensions in the form of a state pension increase. While in the full Budget document the Government confirmed that the state pension will see a 3 per cent increase, £3.65 a week, to meet its triple lock obligations, it did not provide a cost estimate for maintaining the newly-increase inflation link, despite doing so for many other policies in its accompanying documents.
Adviser view: Claire Walsh, financial planner, Aspect8
Millions of us will feel better off because of the abolition of stamp duty, but where was the news about pensions? The introduction of a flat rate of tax relief would have been a no-brainer for the Chancellor. Not only would this benefit eight in every 10 savers, including the lowest earners, it actually would have increased the overall take due to the decrease in higher rate relief. The scrapping of the pensions taper would have been welcome news for the small proportion of people earning over £150,000. This has been an incredibly unpopular policy, not least because it is ludicrously complicated to administer for a disproportionate amount of gain.
But again, these increases are unlikely to last after 2020 when the triple lock will be replaced with a double lock on pensions, removing the inflation link.
Former pensions minister Steve Webb says: “In April next year, millions of workers will be asked to put more money in their pension [through auto-enrolment], and it is vital that they do not opt out as a result. The Chancellor should have done more to support household incomes next April to soften the blow of the pension contribution increase. Instead his meagre inflation-linked increase in the tax-free personal allowance means most people will still be out of pocket unless they also get a pay rise. This is a missed opportunity at a crucial moment in UK pension policy.”
Fidelity associate director for personal investing Ed Monk says: “The Chancellor’s determination to avoid annoying any important groups of voters probably dissuaded him from making any significant change to the pension regime, despite reports that pension saving limits were being eyed up as possible revenue raisers.”
The main pensions policy to note was the uprating of the lifetime allowance by 3 per cent.
The annual allowance, which has dropped significantly since 2010/11, when it hit a high of £255,000, was thought to be a likely target for the Chancellor, with the tapered annual allowance that can reduce the annual allowance to as little as £10,000 for high earners a close second, but these have been left untouched.
Tax paid by those exceeding the lifetime allowance rose to £36m this year, which may appear small but, as Retirement Advantage technical director Andrew Tully notes, planners can actually save clients as much as £16,500 if they have pots just over the allowance by crystalising funds after the threshold is increased so less is subject to the 55 per cent rate.
Financial planners who use Enterprise Investment Schemes and Venture Capital Trusts to invest for their clients will also have more opportunities for tax-efficient investment. The Government is doubling its tax allowance for those schemes funding “knowledge-intensive” companies – though there was no further clarification on how these are defined in the Budget’s supporting paperwork. The allowance will now be £2m, up from £1m, provided the difference is invested in “knowledge intensive” businesses.
By 2022-23, the Government expects to hand back around £10m in taxes to investors through the reform and others designed to support productive investment outlined in the Budget.
The future of policy
These tweaks do not mean that pensions, and in particular pensions tax relief, is off the table in subsequent years, however.
Head of platform proposition at Alliance Trust Savings Sara Wilson says: “It seems the Chancellor has bigger political fish to fry than savers and investors right now. In many ways that’s a good thing but we still think a structural change to pensions tax relief could be on the cards for future budgets. It’s expensive for the Government to maintain and benefits for higher earners (broadly, those earning £150,000 a year or more) have already been shaved back through the tapered annual allowance introduced last year. I just don’t think anyone can afford to relax and take its continuation at current levels for granted.
“Those considering whether to up their pension contributions in the next year or so might want to bear that in mind. It could still be a case of making hay while the sun shines.
“The current system of caps and tapers leaves many savers confused over how they can make the most of the tax benefits. It remains one of the key areas where advisers can help cut through the complexity and add value with holistic financial planning.”
Many were glad that pensions were left alone for the time being.
Chief executive of international advisers deVere Group called the lack of tinkering “extraordinarily positive”.
Aviva savings and retirement managing director Lindsey Rix says: “I’m pleased that the Chancellor has resisted tinkering with the annual and lifetime pension allowances.
“The longer-term focus should be on a ‘once and done’ fundamental reform to the pension tax relief system to make it fair and easy to understand for everyone. We would like to see a system where for every £2 someone saves the Government would top it up with £1.
“We would also replace the term ‘pension tax relief’ with ‘saver’s bonus’ so people have a much clearer understanding of the benefit they gain from saving into a pension.”
Expert view: Steven Cameron, pensions director, Aegon
For savers, this Budget echoed with the ‘sound of silence’, with not a single mention of savings and more to be said about what wasn’t included than what was. This may be just what was needed as Brexit with all its complexity and uncertainty approaches.
But those looking beyond Brexit will see today as a missed opportunity to kick-start the next steps of Government thinking on social care funding, the rights of self-employed and gig workers or means of banning pensions cold-calling to stop scams.
The lack of any mention of pension tax relief is very unusual for Budgets but very welcome. Implementing any change would have been hugely complex and required legislation in a parliament dominated by Brexit.
Pension tax relief does reduce the Chancellor’s tax take in the short term, and there’s a case for redistributing this to those most in need. But this should be done only once there has been time for proper debate and not rushed through as a Government cost-cutting measure.
The immediate abolition of stamp duty for first-time buyers on the first £300,000 of properties up to £500,000 signals the tax breaks pendulum is swinging firmly back towards younger voters. Following on from the introduction of the Lifetime Isa, this may help accelerate when the property dream can be turned into a reality for some.