Gone but not forgotten
Retirement savers were once again braced for change last week, after it was reported that cuts to pensions tax relief were among options being considered by the chancellor ahead of the Budget. However, he used his 71-minute speech to reveal policy that had largely either already been announced by the prime minister or leaked to the media beforehand.
A cut to the ￡40,000 pension annual allowance had been widely touted, possibly because Mr Hammond had stated on a recent trip to Bali that pension tax breaks had become "eye-wateringly expensive”. There had also been some speculation that pension tax reliefs could be harmonised, which could have handed the chancellor a very useful contribution towards funding a ￡20 billion-a-year cash pledge for the NHS.
However, he opted against tinkering with either, deciding, perhaps wisely, that now was not the time for such a politically risky move. Many higher earners were therefore able to breathe a sigh of relief come Monday evening, although those who were hoping that the tapered annual allowance would be abolished were left feeling disappointed.
The taper for higher earners reduces the annual allowance by ￡1 for every ￡2 earned over ￡150,000, dropping to a base level of ￡10,000 for those earning more than ￡210,000 a year. Critics argue that this quirk of the pensions system, introduced by George Osborne, has introduced a nightmarish level of complexity for higher earners trying to plan for later life.
“It is disappointing that the tapered annual allowance wasn’t scrapped, and the contribution rules weren’t simplified in general, but no change is better than added complexity,” said Claire Trott, Head of Pensions Strategy at St. James’s Place. “We hope this will allay fears of a raid on pension tax relief, at least in the short term, to allow people to plan for their retirement: a long-term investment.”
Making allowances
Budget notes also confirmed a further rise to the lifetime allowance from next April, meaning that many individuals, including senior civil servants, NHS professionals and higher-earning private sector employees, will be able to withdraw a little more from their pots before being hit with a potential 55% tax penalty. The increase from ￡1,030,000 to ￡1,055,000 was slightly more than expected.
“The confirmation of the rise of the lifetime allowance to ￡1,055,000 is welcomed because, yet again, there was a fear this could be cut to help raise the tax taken on pensions at retirement,” commented Trott. “Had this been changed, more trust in pensions would have been lost just at a time when the number of company pension scheme members is on the rise because of the success of auto-enrolment.”
In another boost for retirees, the Budget confirmed a ￡221 increase in the State Pension for next year, thanks to the triple lock. Under this system, the level of the State Pension rises every year by a minimum of 2.5%, the rate of inflation, or average earnings growth, whichever is highest. The Office for National Statistics recorded inflation at 2.4% in the year to September; but given that this is below the 2.6% average rate of increase in earnings recorded in July, it is wage growth that will determine the level of next April’s State Pension rise.
Sting in the tail
Although it was a relatively quiet day for pensions, some 80 members of the Women Against State Pension Inequality (WASPI) group held up banners and banged on the glass screen of the Commons’ public gallery during Hammond’s speech. Labour MPs rose to give them a prolonged round of applause (indeed, the campaign enjoys broad cross-party support).
The chancellor will no doubt be well aware of the complaints from WASPI, which has long fought against changes to the State Pension age for many women in their 60s. The rises, it argues, have been imposed with a lack of appropriate notification and much faster than was originally promised. Nevertheless, Mr Hammond did not reveal any moves to placate campaigners angry with the phased equalisation of men’s and women’s pension ages.
Stay of execution?
With cuts to pension tax breaks seemingly deferred, higher earners may be able to rest easy for another year. However, the danger of political turmoil is still very much in the air and a no-deal Brexit scenario may well require an emergency Budget in the spring, as the chancellor himself hinted.
Hammond said he was “confident” a deal between the UK and European Union would be secured. However, if fiscal headwinds return, then a cut to pensions tax relief could well be back on the table.
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