The government has published its response to the Treasury report on household finances. Downplaying the possibility of structural reform to pension taxation, possibly a hint at changes to pension allowances, no commitment to increase auto-enrolment contributions.
And reiterates its commitment to help self-employed save for retirement. Contributor Tom McPhail, Head of Policy – Hargreaves Lansdown.
Only a couple of weeks ahead of the Budget, it was unlikely the government would announce anything radical but there are some useful indicators of their current thinking. The Lifetime ISA is clearly here to stay, as are the pension freedoms; it is also clear the government is in no hurry to ratchet up the auto-enrolment contributions.
On pension taxation, the Treasury reiterated the lack of consensus for any structural reform of the system, suggesting the Budget is unlikely to contain any radical moves such as abolishing higher rate tax relief. However, they did also highlight the impact of recent changes to allowances, in particular the introduction of the Tapered Annual Allowance in 2016: It doesn’t require a great leap of imagination to conclude they might be returning to this theme in the forthcoming Budget.
In its response to the Committee, the government has reiterated its principles for pension taxation: Simplicity and transparency – to encourage greater engagement with pension saving and strengthen the incentive for individuals to save into a pension
Personal responsibility – so individuals are responsible for ensuring they have adequate savings for their retirement, to encourage them to save during their working lives to meet their retirement aspirations; Build on automatic enrolment – so individuals are encouraged to save more; Sustainability – and in addition it should be in line with the government’s long-term fiscal strategy.
It also stated: The consultation [in 2015/16] showed there was no clear consensus on reforming pensions tax relief in a way that met the four principles set out above. The government is also aware that any changes to the pensions tax relief regime could have significant impacts for pension schemes, employers and individuals. While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015.
In its response today it also highlighted the recent introduction of the Tapered Annual Allowance and the reduction to the Lifetime Allowance. This looks as good a steer as we’re likely to get that any changes to pension taxation will likely fall on higher earners, probably through a tightening of the Tapered Annual Allowance.
They could for example move from:
- Annual allowance = £40,000
- Threshold income = £110,000
- Adjusted income = £150,000
- Annual allowance = £25,000
- Threshold income = £100,000
- Adjusted income = £125,000
This is based on Maintaining the existing relationship between annual allowance, threshold income and adjusted income; Neat round numbers and Government being able to state that the taper only has an impact for those with a taxable income above £100,000, and
The impact of drop in either adjusted income or the AA will be much greater than when first introduced as some of those caught by the taper will have used up pre-taper carry forward. This means that the potential tax raised should be higher. The existence of carry forward also means that the only transitional measures needed are to cover salary sacrifice post announcement.
The Lifetime ISA is here to stay
190,000 people have voted with their savings in support of the Lifetime ISA; the government clearly doesn’t want to jeopardise their goodwill by now withdrawing what it sees as a successful innovation. The Treasury also rejected calls to reduce the tax charge on early withdrawal and instead has taken steps to clarify how it is applied.
Pension savings rates need to increase, on that everyone is agreed. However whilst much of the pensions industry would like to see the government perform the hard work for it by legislating for increases, the government has made it clear that isn’t happening in the foreseeable future. It also rejected the idea of Save More for Tomorrow, a behavioural device to get employees to commit to contribution increases in the future. This is because whilst the idea is sound in principle, it is hard to deliver at any kind of scale. The focus of attention is therefore moving towards improving individual engagement and encouraging pension savers to make informed choices about how much they save and where their money is invested.
We’d like to see more pressure brought to bear on trustees and governance committees to account for how well members are being engaged. We’d also like to see individuals given ownership of their retirement savings by having the right to choose their own auto-enrolment scheme, rather than being forced to accept a new workplace pension every time they change jobs. The self-employed are a constituency to whom the government wants to appeal. They have reiterated their commitment to helping them save for retirement, without as yet making any meaningful proposals. State pension triple lock here to stay for the duration of this parliament.
No default retirement but pathways can help
The government has rightly rejected the notion it is possible to ‘default’ someone into retirement, in the same way they can be defaulted in starting saving via auto-enrolment. People’s circumstances are too complicated and the risks of harm are too great. However the government has added its support to the notion of retirement pathways identified in the FCA’s Retirement Outcomes Review as a way to simplify the choices individuals make at retirement.
The government also highlighted the benefits of a blended retirement income solution, combining annuities and drawdown to provide a balance of flexibility and security. This is an approach Hargreaves Lansdown has actively advocated for years now, and we are pleased to see it enjoying political recognition.