Pension experts were relieved that there were no new plans to reform UK pensions in this year’s Budget but were equally disappointed to find that there was no backtracking on the pre-Budget’s unpopular proposals for a higher-rate tax relief cut.
Chancellor Alistair Darling mentioned little extra about pensions in his last Budget before the general election in May.
Paradigm managing pensions partner Steve Bee says: “There were no new big announcements in the Budget for pensions, which is great because we have had enough shooting from the hip, to be honest.”
But there were a few small adjustments. The Chancellor announced plans to assess whether to allow couples to combine their pension pots to buy annuities. The report said: “The Government remains open to proposals for further simplification. It is also open to proposals consistent with these principles for couples to pool small pension pots to achieve better value by purchasing a joint-life annuity.”
Standard Life head of pensions policy John Lawson says: “The ability to combine pots for couples is particularly welcome and may help ensure that the death of the first spouse or partner does not leave the survivor in poverty.”
Darling also stoked the debate on the default retirement age. Currently, employers can force 65-year-old men and 60 year-old women into retirement but the Gov-ernment has already announced plans to increase the state pension age from 65 to 68 for men between 2024 and 2046 and to 65 for women by 2020.
Darling said: “To enable people who want to work longer, we are consulting on reform of employers’ right to make people retire at 65. We are looking at options which include scrapping the default retirement age, raising it or giving employees stronger rights.”
Association of Independent Financial Advisers’ director general Chris Cummings says: “We need an open and honest debate about our ageing society. The current situation does not recognise the nature of retirement, which is now much more of a phased activity.”
But for most pension pro-fessionals this Budget was a bit flat after the bombshell dropped in the 2009 Budget.
In last year’s Budget, the Chancellor revealed plans to reduce the tax relief on pension contributions for the highest earners. The Chancellor proposes reducing tax relief on a tapered basis for people with income of £150,000 or more and contribute over £20,000 a year, down to holders earning £180,000 or more who would receive just basic tax relief.
In the pre-Budget in November, the rules were refined so the tax relief reduction included all those with total income of £150,000. As this includes pension contributions, this means that anyone with an income of £130,000 could potentially be affected.
Experts were angered to find that the Chancellor announced no amendments to the reforms, even after several months of hard lobbying against the rules. Lawson says: “This has the potential to turn into one the most damaging acts against pensions in a generation.”
National Association of Pension Funds chief executive Joanne Segars says: “The Government should have gone further and abandoned its damaging pensions tax plans for higher earners which will only serve to weaken pension provision for all.”
The new reforms mean that those whose earnings have already been taxed at 40 per cent would only be eligible for a 20 per cent rebate. As any income generated from a pension is also subject to income, this means those in the highest tax bracket could effectively be taxed twice on the same income.
Bee says: “It is amazing that we think it is almost normal to hear that wealthy people will be taxed twice for saving in a pension – we have to make sure that we never think that’s normal. We should not throw away one of the principles of pensions which is that you only pay tax once on the money you earn while you are on this planet if you save in one. Higher earners now pay tax twice if they save and that is a door that should have been left tightly shut. It has only been opened a crack because its only wealthy people affected but one day that door might be kicked wide open, and if that day comes we’ll all regret it.”
Lawson says: “If the Government wants to achieve a fairer distribution of pensions tax relief, there are other ways to go about it such as reducing the value of the annual allowance. This idea has near unanimous support across the industry yet the Treasury has declined to give it serious consideration.”