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Off the rails: Govt urged to wrest control of pensions and tax policy

The dramatic Budget U-turn which saw Philip Hammond ditch plans to raise National Insurance rates for the self-employed has left the Chancellor’s reputation – and his financial plans – in tatters.

Budget proposals do not always make it onto the statute books. But they are rarely ditched within a week, particularly when they have formed a central plank of the Budget speech.

Many though are seeing this latest climbdown as part of a wider Government problem, where short-term necessity is prioritised over strategic long-term planning – particularly when it comes to issues of pensions and taxation.

‘Rollercoaster policy’

Royal London policy director and former pensions minister Steve Webb wants to see an end to what he calls “rollercoaster policymaking” from the Treasury.

Webb says he wants to see a commitment to longer-term goals for both tax planning and pensions – giving individuals the confidence to save and invest, without worrying the goalposts will be moved every year.

It is not just the scrapped increase to Class 4 NI contributions from 9 per cent to 11 per cent that has created the sense that policy is made on the hoof.

The Budget also set out plans to significantly reduce the dividend allowance from £5,000 to £2,000, despite the measure only being introduced 12 months ago. The £2,000 dividend allowance will come into effect from April 2018.

Pension policy in particular has been subject to an array of changes in recent years: from large scale reforms, such as pension freedoms, to smaller scale tinkering.

The lifetime allowance, for example, was £1.5m in 2006. Since then the level at which it is set has been changed seven times, peaking at £1.8m between 2010 and 2012 before falling gradually to its current £1m level.

Over the same period there have been a similar number of changes to the annual allowance which has been cut from £245,000 to £40,000 in the space of seven years.

In the Budget, Hammond also confirmed the money purchase annual allowance would fall from £10,000 to £4,000 in April, despite widespread industry opposition.

Webb says: “Now that the Chancellor has committed to leave NICs for the self-employed alone, we also need a long-term strategy for pension policy.”

He says one of the best ways of doing this would be for the Government to set out a clear destination of how it would like the savings and investment landscape to look in future.

He says: “For example, it may be their plan is to replace private pensions with Isas. If this is the case, then it would be better if the Government was clear about this, set out its ideas, and provided evidence to justify this decision. Instead we get piecemeal reductions in pension allowances, and an increase in Isa allowances – but with no indication as to whether this is part of a longer-term strategic plan, or simply a stop-gap measure to find an additional £500m.”

AJ Bell senior analyst Tom Selby agrees. He says: “When it comes to pensions policy there is a clear need for long-term thinking to mirror the long-term commitment savers make with their money. The Chancellor’s NI U-turn will have come as no surprise to anyone who has followed the Treasury’s disjointed approach to pensions taxation.

“No one in their right mind would design the current system, which is riddled with complexity and undoubtedly causes many to give up on the idea of saving for retirement altogether.”

The ideal vs the reality

The system is creating difficulty for advisers, investors and providers.

In response to quickfire reforms, “sticking plaster” legislation has often needed to be introduced to address potential problems.

But while pensions remain a political football, Hargreaves Lansdown senior analyst Laith Khalaf questions whether it is realistic to expect a longer-term plan.

Khalaf says: “In an ideal world it would be great to have a period of 20 years when the  framework for pensions did not change at all. But the reality is over this period there will be different governments, and they are likely to make changes.

“Any changes to pensions should be done to improve the pension system as a whole. This doesn’t mean some groups won’t be disadvantaged, but politicians should be making changes to improve pension policy overall, not simply to fill a black hole in the Government’s finances.”

Khalaf argues this approach can be self-defeating for the Government if it leads to fewer people saving enough for their retirement, with more significant revenue black holes in the future.

But he adds there is “low-hanging fruit” dangling in front of policymakers in the form of pension tax relief.

What next for long-term care funding?

Much of the additional revenue raised in the Budget was earmarked for increased spending on social care. The national insurance U-turn is likely to cost the Government £2bn between now and 2021/22. Does this mean the issue of long-term care funding will be kicked into the long grass again?

Royal London policy director Steve Webb says: “What we need here is leadership and decisiveness. In this case the Government does has a plan, it just needs to stick to it.”

As he points out, in the last 20 years there have been a number of major reports, white papers and even a Royal Commission looking at the issue of long-term care.

Webb adds: “We don’t need to go back to the drawing board with another Green Paper.”

Parliament has legislated on the Dilnot report, a review into long-term care funding carried out by economist Andrew Dilnot in 2011.

The main recommendations included a cap on long-term care costs and increasing the means-tested threshold above which individuals are liable for full care costs from £23,250 to £100,000.

But Aegon pensions director Steven Cameron says this is fraught with difficulty.

He says: “We need real long-term strategic thinking on this issue. The Government needs to say what the state can afford to pay, then look at ways to encourage people to save to help towards these costs.”

He adds this potentially creates opportunities for advisers. He says: “People are going to need help negotiating the complexities of this, whether it’s transforming their pension into an income, or using pensions, investment and equity release to manage future care costs.”

Taxing times

Rumours of pension tax relief reform continue to swirl. One Treasury source has been quoted as saying: “That’s what is being talked about. What else is there? There isn’t much else. What else can you do? Hammond’s not going to compromise the Government’s reputation on fiscal integrity and we’re not going to be borrowing more. That’s very clear.”

This brings us back to Hammond’s current problem: how to fill the £2bn black hole caused by the NI U-turn?

Aegon pensions director Steven Cameron says: “The original proposal to increase Class 4 NICs was linked to state pension changes.

“I would hope we don’t see widespread changes to pensions now as a result of this change of heart on NI.”

The Treasury may be tempted to change pension policy, given its manifesto commitments to protect spending in many areas, and not to raise other direct taxes, including income tax, NI and VAT.

But most experts think such a move is highly unlikely in the current political climate, given the Government’s slim majority  and the fact this would hit many Conservative voters.

Yet there are other ways the Treasury can limit spending on pension tax relief. Webb says he would not be surprised if there were further cuts to the annual allowance.

He says: “If you cut the current annual allowance of £40,000 to £35,000, this would raise around £500m a year – a similar sum to the amount that the NI increase would have brought in each year.”

The Chancellor might also look to lower the lifetime allowance again, though this could cause other problems.

Cameron says: “At £1m this already seriously limits the amount people can save for their old age, particularly if they are also trying to cover future care costs.”

Aviva head of financial research John Lawson points out there is already a significant discrepancy between what those in defined contribution pensions and what those in defined benefit  schemes can save.

He says: “If you have a DC pension funded up to the maximum £1m limit this will buy an index-linked income of around £22,000 to £25,000 a year.”

But thanks to the way DB schemes are valued, members can take a retirement income up to £50,000 a year, without breaching the lifetime allowance.

Lawson says there could be an argument for increasing the lifetime allowance for DC savers, while simultaneously changing the way DB pensions are valued to bring these closer together. He says if done correctly, this could also raise additional revenue for the Exchequer.

But as he points out, most of those qualifying for DB pensions of this size are working in the civil service: this may not be the easiest of political reforms to usher through.

Lawson disagrees the Government has failed to demonstrate “long-term strategic thinking” on pensions. He says: “The main problem has been it hasn’t always demonstrated joined-up thinking when it comes to communicating these plans.”

For example, he says Hammond’s initial proposals to increase NI payments for the self-employed were “broadly a good idea”. He says: “The flat rate state pension was introduced two years ago. And overnight most self-employed people saw their pension entitlement rise by about £35 a week.

“To buy this on the open market would cost between £60,000 and £70,000. I don’t think it’s unreasonable to ask people to pay an additional 1 or 2 per cent to pay for a better state pension.”

Lawson believes the mistake was not raising the Class 4 NI rates when the flat rate state pension was initially introduced.

Both Lawson and Cameron point out the NI changes have not been abandoned altogether. They suggest it is likely the reforms have been postponed to the next Parliament.

Cameron says: “The other big- ticket item is the state pension triple lock. There was another manifesto commitment to protect this until 2020, but after then there may be more room for manoeuvre .”

Many in the financial services industry agree there would be a huge benefit to removing political interference from pensions.

Selby says: “We believe an independent tax commission could help to set the framework for stability in pensions policymaking and rebuild confidence in the system.”

But with the uncertainty surrounding Brexit and the future direction of the economy it seems unlikely any Chancellor is going to willingly hand over the reins of pension policy, and with it the flexibility to raise additional finances.

Khalaf says: “Back in the real world investors have to make the most of the various allowances and reliefs that exist today.

“I don’t think higher rate tax relief is going to disappear soon, but I’d be very surprised if it remains a long-term feature of pension savings.”

Expert view: Iain Anderson

Iain-Anderson-MS-CUTOUT-250x255.jpg

It has not been a great week to be Chancellor. We have seen many a policy pivot from Gordon Brown and George Osborne on personal taxation, pasty taxes and the rest, but the headline in the last week that will hurt Number 11 the most is the idea of the “screeching U-turn”.

The idea that the Government had gone back on a key 2015 manifesto promise not to raise personal taxes stuck. And with it the policy was doomed, and rapidly consigned to the political dustbin. Even worse, “experts” like the Institute for Fiscal Studies, the Resolution Foundation and even the Government’s own appointed guru on workplace rights Matthew Taylor had lined up to advocate the policy.

As Chancellor, your sureness of touch is key. The signals you give to voters, markets and international investors are critical. So the key question is: will it do any lasting damage to the Chancellor?

Up until now Philip Hammond has carefully cultivated an image as a detail-driven politician. One who thinks before he talks, and that is rare. He will be bruised but not bowed by all this. In any case, he has been undertaking a radical restructuring of the way in which the Treasury operates to ready itself for the Brexit battles ahead.

Unlike Brown or Osborne, who wanted to pry into every Government department, Hammond
focuses solely on the main economic issues. Unlike Gordon and George he does not want to be Prime Minister. But he does want to help promote financial services domestically and globally and the sector should give him the space to do just that.

Financial firms should cut him some slack. Politicians bounce back. Hammond knows that and wants to play the long game too.

Iain Anderson is executive chairman at Cicero Group

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. So we want to be known for great financial advice for the general public with assets or money to be looked after. Why don’t we start with ourselves;
    The LAW Society is associated with LAW yers
    The Personal Finance Society is associated with PERSONAL Finance? How about changing it to
    The Financial Advice Society and then it may get to be known for being associated
    with ADVICE (ADVISERS).
    PROVIDERS perhaps WE could call SERVICE PARTNERS and they could call us PROFESSIONAL ADVISERS rather than INTERMEDIARIES, BROKERS OR ANYTHING ELSE.
    WE could display indicative fees online included in our online T&C’s in % and £’s.
    the FCA and PFS (FAS) could promote the fact that the majority of IFA’s have no charge for the 1st meeting(NO, don’t say at our expense!), The FCA & PFS (FAS) could do more to promote their unbiased lists of IFA’s. PROVIDERS etc. could stop promoting the biased UNBIASED who move you further up the food chain if you pay them more OR the unvouched for VOUCHEDFOR who promulgate unvouched for statement to unsuspecting Clients on their website,
    WE could stop moaning about SJP, display indicative fees on our websites and in our T&C’s, MM could stop their misleading headlines, Govt could have a joined up strategy for retirement savings that was not subject to the regular change of Chancellor, Govt could convert to DC pension schemes for MP’s, Civil Servants, Councils, Teachers, NHS employees, Doctors and thereby save enough money to keep the State Pension ‘triple lock’ for pensioners.
    Many 50 somethings are still hurting from the WP Endowment sales that promised the Earth and delivered sludge. Annuities are at a low point, Politics is ruining global markets, WP funds are not, Consolidators that rise from the flames have MVR’s of 34+% for transfers even within a year of NRD, GOVT sticks with the ubiquitous age 75 for pension penalties even though they have announced that everybody is living longer and therefore the SP is now at age 67 and to be 68, 75 s/be 77 and then 78, GOVT introduces LISAs with more complications than pensions, plus penalties and it is ageist, GOVT sends out a savings leaflet that included Premium Bonds but does not include pensions, Pension Protected Tax Free Cash is only available if you take out an annuity (Pension Freedoms?), the LTA has been eroded from £1.8m to £1m, the AA is about to be slashed to £4,000 for flexible drawdown pensioners.

    So imagine that you land on this Earth with assets over £100,000 and ask some one what is the best way to save for retirement? The answer, obviously is to contact an IFA. BUT we need to hope that they don’t look back 50 years to see the above mess!
    There, that’s all off my chest, I can go and help somebody with their retirement planning now.

  2. Hell fire – we don’t want clarity of policy for a generation or two. Some of brighter members of the public might be able to plan for themselves without our guidance through the minefield!

  3. Pensions and finance demonstrate perfectly the two following things:
    1.) Politicians only care about one thing…… the next election.
    2.) No politician is financially literate and competent.

    It’s why I’ve always advocated that Politicians should only be allowed to be in control of how the budget they are allocated is spent.

    But that the budget and tax strategy etc should be controlled by a seperate independent, directly elected body, a body where only appropriately qualified/experience persons can serve. Where anyone serving on that body is not allowed to be affiliated to or show any bias towards any particular political party.

    Only then, would we get proper long term fiscal policy that works in the countries best interests. Given that the countries finances are the most critical thing, and that all tax, whilst necessary is legalised and legally enforced theft, they should never be allowed to be a political football.

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