It is that time of year again. The Christmas lights are up on Oxford Street and the stores are already full of mince pies. But before the celebrations can start, we have an Autumn Statement to get through. Perhaps the last for this Government if Philip Hammond gets his way.
The Chancellor has said he wants to move away from gimmicks and micromanagement. And while there have been some positives in recent pension policy – namely the pension freedoms and state pension reform – other developments have been less helpful.
We are asking Hammond to sit on his hands when it comes to further tinkering with the system.
The main request is to not make any sudden moves on pension tax relief and certainly not to adopt some of the wilder ideas doing the rounds. No doubt we will have to come back to this subject, particularly if fiscal gaps appear as we move towards leaving the EU. But there are no simple answers here. Until we are through auto-enrolment and have escalated minimum contributions to the full 8 per cent, it feels dangerous to be meddling further with incentives.
Our second ask is that the auto-enrolment timetable is maintained. It seems we are making good progress on getting smaller employers on board and the next big test is now increasing contributions, which is due to start in April 2018 with a 2 per cent increase for employees.
Until we have escalated
auto-enrolment minimum contributions to 8 per cent, it feels dangerous to be meddling further with incentives
The Government already slipped the timetable for this by six months at the last Autumn Statement, apparently to make it simpler to administer. This helpfully generated over £800m of extra tax but we urge the Chancellor not to delay again. In the medium term we have to get contributions up well beyond 8 per cent. We will never get there if we do not start now.
Meanwhile, it looks like the Lifetime Isa is on track to launch in April. There are some challenges in the latest set of regulations that need ironing out but the main focus here is on how the Government positions the product. It has to make clear people are invariably better off with auto-enrolment than opting out to save in a Lifetime Isa. The employer contribution far outweighs the government bonus, even after tax. We think the Lifetime Isa is great for consumers but it needs to exist as an add-on to auto-enrolment, not as a substitute.
Our final couple of requests are around the various tax allowances for pensions. It is an old refrain and regularly ignored but we will make it anyway. Clearly, tax relief needs to be limited but the current system creates massive complexity and uncertainty. The lifetime allowance is a tax on successful investing for defined contribution schemes and should be removed. The annual allowance is unfairly penalising even modest earners with long service in defined benefit plans and also needs looking at.
The tapered annual allowance has to be one of the most complex ways of limiting benefits for high paid employees we could possibly imagine. It is causing massive headaches for employers and pushing senior people out of pension saving, which could have significant consequences in the long run.
Higher value savers in DC pension schemes bear a higher proportion of scheme running costs and so subsidise those on lower contributions. Excluding them from schemes not only leaves them disengaged from pensions but could mean fees rise for those who remain. Let’s find a simpler way of keeping them in the system while still limiting the benefit they get.
Even without further change there is still plenty to be getting on with. The industry is working hard on the prototype for the pensions dashboard, the Financial Advice Market Review is due to report in March, the Lifetime Isa is due in April and we expect the FCA’s Retirement Outcomes Review to throw up further change around freedoms. This on top of the changes due in April already set out in its policy statement on the subject earlier this year.
The Chancellor has some big issues to deal with. Compared to these, pensions is a bit of a side show for once. Let’s hope it stays that way until after Christmas at least.
Richard Parkin is head of pensions policy at Fidelity International