Prior to the budget announcements, the HM Treasury ended speculation by ruling out that the Chancellor would overhaul pension tax relief, making it clear that he was not going to abolish higher rate pensions tax relief or move completely to an ISA-style pension regime (just yet).
The budget did not provide much in the way of controversial pension reform. Despite much of the conjecture, the pensions annual allowance remains static, there was no further reduction in the lifetime allowance, the tax-free lump sum remains intact and there was no crackdown on salary sacrifice.
However, the Chancellor did announce a few changes that will have an impact as detailed below.
New lifetime ISA
The Chancellor announced a new lifetime ISA which will be available from April 2017. This enables people between the ages of 18 - 40 to open a lifetime ISA account, and any savings put into it before age 50 will receive an added 25% bonus from the Government i.e. £1 for every £4 put in. Consumers are able to save as little or as much as they want each month, up to £4,000 a year.
Money in the lifetime ISA can be withdrawn before the age of 60 to help buy a first home (worth up to £450,000) or can be used to save for retirement and withdrawn tax free after age 60. The money can be withdrawn any time before age 60, but the Government bonus (and any interest or growth on this) will be lost and also a 5% charge will be payable. The Government is proposing to consider whether there are other specific life events in which individuals will have access to their savings plus the Government bonus in full. The key question is whether this will result in consumers under 40 saving more for their retirement or not.
The total amount that can be saved each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.
The introduction of the lifetime ISA begs the question of how it will sit alongside the auto-enrolment regime. Former pensions minister, Steve Webb commented:
’Just at the point that millions of under forties have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion. Young savers who opt out of pensions in favour of a lifetime ISA lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot - how will they know which is right for them? Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.’
We also note that the issue of proposed reforms of the tax incentive to save has been neatly circumvented. The Chancellor has brought in a voluntary system, rather than make the changes to a tax exempt exempt (TEE) system compulsory. The lifetime ISA gives increased flexibility, and is likely to be the more attractive option for consumers; it will direct them away from the standard exempt exempt tax (EET) system for pension savings. As less money will go into EET, the Chancellor’s yearly tax relief spend will be lowered i.e. it will bring forward tax receipts. In effect, he has brought in a limited form of TEE through the back door. It will be interesting to see the effect of this on the forecast budget surplus.
The lifetime ISA fact sheet can be found here.
Pension advice allowance
The Government will consult on introducing a pension advice allowance to enable members to withdraw money from defined contribution pensions to fund financial advice. The budget advised that measures could apply to members up to the age of 55 and that they would be allowed to withdraw up to £500 tax-free from their defined contribution scheme to redeem against the cost of advice.
The exact age at which people can do this will be determined through consultation. This means that a basic rate taxpayer could save £100 on the cost of financial advice.
Public financial guidance review
The Chancellor announced that the Government will review its provision of financial guidance providers (the Money Advice Service, The Pensions Advisory Service and Pension Wise) to ensure that consumers can access the help they need to make effective financial decisions. It will include:
- a new pensions guidance body to ensure consumers can get all their pensions questions answered in one place, at any time; and
- new, slimmed down money guidance body charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps to ensure that consumers can access the debt advice and money guidance they need.
These latest changes to public financial guidance follow on from the recommendations that stemmed from the financial advice market review (FAMR) published earlier this week. The FAMR can be found here.
To help the next generation clearly view their pensions savings, the Chancellor announced that he will ensure the industry designs, funds and launches a pensions dashboard by 2019. This will mean an individual can view all their retirement savings in one place.
Readily available access to pensions information could allow savers to decide how best to manage their pots, including whether to transfer to different schemes. A dashboard would also allow individuals to keep track of old pots, and equally for schemes to keep track of dormant members.
However, there are issues surrounding the dashboard in terms of the clarity of purpose between the pensions industry, the Financial Conduct Authority and the developers; cost and complexity of development and implementation; data protection; and public engagement with the dashboard. We will need to wait and see if any incentive will be offered to the industry to encourage development of a pensions dashboard product.
Salary sacrifice restrictions
The Government is looking to restrict the range of benefits available under salary sacrifice arrangements.
As salary sacrifice benefits are often subject to more favourable tax treatment than salary, HM Treasury said it was considering limiting the range of benefits that attract income tax and national insurance contribution advantages when they are provided as part of salary sacrifice schemes.
However, the Government's intention is that pension savings, childcare and health-related benefits such as cycle to work should continue to benefit from income tax and NICs relief, as applicable, when provided through salary sacrifice arrangements.