In the Pensions and Lifetime Savings Association’s (PLSA) regular column for Professional Pensions, the trade body’s director of policy and advocacy takes a look at the multiple changes chancellor Jeremy Hunt introduced in his Spring Budget yesterday.
It was difficult to miss all the speculation in the run up to the government Spring Budget, with pension tax reforms being widely reported. The chancellor did not disappoint as multiple changes saw the busiest pensions budget since freedoms was announced in 2015.
Moreover, no sooner than the chancellor announced plans to abolish the lifetime allowance (LTA) than we had the shadow chancellor promise to reintroduce it if they win the next general election. Well, as we always say, retirement saving is a long-term endeavour, so we need stability in the regime. It doesn't look like we will be getting that any time soon.
In order to encourage employment among older workers, Jeremy Hunt confirmed he would be abolishing the LTA, increasing the annual allowance (AA) to £60,000 and more than doubling the money purchase annual allowance (MPAA) to £10,000.
The pensions tax relief system provides crucial support for people by boosting their savings over the long term. The PLSA has long argued that tax relief is needed to encourage behaviours which help more people achieve an adequate income in retirement - these measures will help savers do just that.
Terminating the LTA completely and increasing the AA and MPAA will encourage older, often highly skilled or experienced workers, including senior doctors, to stay in the workforce and provide more flexibility for retirees to re-enter the world of work. These changes will also allow additional scope for savers to contribute lump sums, perhaps from an inheritance or a redundancy payment, into their pension to meet any shortfalls before they retire.
While these changes to tax relief will be of most value to average and higher earners, it is positive that the government did not bring forward the date at which the state pension age would rise to 68 as has been speculated. The silence on this topic may suggest bad news, an increase, in the weeks ahead.
Many people, especially those on lower earnings, rely heavily on the state pension for their retirement income. Increases in the state pension Age fall disproportionately on people on lower incomes who generally have poorer longevity. We welcomed the government's recent decision to introduce a 10% rise in the value of the state pension from next month, in line with the triple lock.
The government's recent support for new legislation that enables increases in the amount of auto-enrolment pension saving will also help people on lower and average earnings. We believe the government should go further in this regard by gradually increasing pension contributions in the late 2020s and early 2030s so they rise from 8% to 12%, with a larger share of the increases falling on employers, so future pension contributions are split evenly between the employer and employee.
It has been made clear that the government wishes to find ways to encourage private sector pension funds to invest in the UK. We have worked with the government on this issue in the Productive Finance Working Group and look forward to contributing to their further work in this area, both on the LIFTS initiative, and on any broader proposals planned for the Autumn Statement.
It is also worth noting the government's plans to consult on whether to further consolidate the investment pools which operate in support of the Local Government Pension Scheme (LGPS). As it is only five years since the first pooling reform which set up eight investment pools to serve the around 90 local authority pension funds in England and Wales, we think a further large-scale reform would be unlikely to achieve very much at this time.
Although there are more areas in the pension system which need to be reformed, especially for those in the under-pensioned groups, the three pensions tax changes yesterday certainly do not undermine efforts to achieve pensions adequacy, unless the reaction to the abolition of the LTA ends up being the catalyst for a wider, and no doubt less generous, new regime being introduced.
Nigel Peaple is director of policy and advocacy at the Pensions and Lifetime Savings Association