Every year the British chancellor stands up to give his speech on how he intends to guide the UK economy on a successful journey by amending tax rates, rebates and allowances amongst other things to encourage people into altering their actions to the benefit of the populace at large. In an ideal world this would ensure riches were fairly distributed and everyone contributed their just amount.
The area of focus for this article is with pensions. Has George Osborne surprised everyone by leaving the whole area alone? Prior to the budget announcement later today, from a pragmatic viewpoint, this could be a valid option. After all, substantial pension reforms, which were enacted only last year, were heralded as a major success by providing pension holders huge control of their wealth. Why then, only one year on would any amendments be required? Despite this, it is highly unlikely for a number of reasons not least including the fact that there has been another treasury consultation into pensions from which numerous rule amendments have been mooted.
Pre-budget expectations, rumours and the rule changes enacted
Outcome: There is no indication so far that this will be scrapped though the UK government are looking into potential avenues to limit the benefits offered.
Future considerations: From a pensions’ perspective, since salary sacrifice allows additional payments of tax to be avoided with no benefit to the government it is very feasible to foresee that this tax avoidance measure will be curtailed and reduced going forward.
Outcome: Despite rumours of a further reduction both limits have been left unchanged.
Future considerations: Both limits have been reduced in the recent past and this trend may continue especially with the introduction of lifetime ISAs – see below – which have lower maximum contributions.
In essence, a pension simply defers income until a later date when the tax will be due. The exception is for non-taxpayers who receive a 25% boost to any contributions that they make.
Proposition: It was mooted that the current tax relief system, which is very expensive for the government, would be replaced by a flat rate system where everyone makes contributions from their net salary and receive the same level of rebate.
Outcome: The existing tiered pension system remains though a new pension option, known as a lifetime ISA, will run concurrently. This appears to offer simplicity and a variation of the flat rate tax.
Future considerations: Pension rebates are very expensive for the government and the new lifetime ISA points to a change of direction for pensions. Up until now pensions have always been based on income tax being deferred. Now, lifetime ISAs offer the option of paying tax now but receiving a boost through a subsidy with no further tax to pay. This seems like a great system for everyone but there are downsides, including the loss of employer contributions, when compared to a pension.
Outcome: Although this was another potential target that the government could have looked to reduce or scrap the benefits of no changes were implemented.
Future considerations: In essence, pensions offer a way to legally avoid paying tax on up to 25% (or 30% for QROPS) of one’s income under a high limit (currently £1.25 million reducing to £1 million from the 6th of April) The government’s new pension scheme, the lifetime ISA, offers an equivalent tax free lump sum though on a far lower scale. At present one can only invest up to £5,000 per year between the age of 18 and 50 (i.e. a total of £160,000 + growth). The discrepancy between these amounts along with the fact that pensions offer increased subsidies for both higher and additional rate taxpayers suggests that this may be a prime target for future cuts.
Outcome: A new class of Individual Savings Account known as a lifetime ISA is to be created commencing from April 2017. A further consultation process will be carried out in the coming months to iron out the exact details of how the policy will work. In essence though it will enable anyone between the age of 18-40 to open an account and pay up to £4,000 per year into it. They will then receive a government top up of 25% so the maximum investment per year will therefore be £5,000. Any income can then be withdrawn tax free assuming the account has been held for at least 12 months and either the proceeds are to used to fund a first home worth under £450,000 or the account holder is over 60.
Despite pre-budget reports of further sizeable pension changes these were near quashed when a government agent mentioned it was not the right time, thereby placating those concerned over the potential for alterations. This transpired to be the case. In a surprise move the government did, however, bring in their new lifetime ISA scheme which are pensions in all but name. Their flexibility of offering the holder the option to invest in a property or retirement mimics a key aspect of other retirement schemes throughout the world.
Further information on lifetime ISAs will follow soon. The overriding impression of this budget is that, although no direct action on reducing pension benefits has occurred this time the door has been left open for future cuts. The lifetime ISA also appears at first glance to be generally beneficial though it does add complexity to the options rather than the preferable route of simplifying them.