21st March 2016 Rosalind Connor in Economia on what the Budget means for pensions
Rosalind Connor of ARC Pension Law examines what this year’s Budget means for pensions
For an industry whose tax treatment has generated a lot of headlines over recent weeks, pensions has escaped very lightly from the 2016 Budget. Osborne had been considering radical changes to pensions taxation following his July 2015 Budget, with a clear indication that he would change to a taxed up front, no tax on growth and receipt basis (the so called TEE structure), like that for ISAs. Then, it was hinted, he had threatened this very radical change in order to slip through smaller, but still significant changes, such as the end of the tax-free pensions commencement lump sum, of up to 25% of fund, or limiting tax relief on contributions to basic rate tax.
In the end, he did none of these. Pension taxation was left strictly alone. Much political speculation will no doubt follow as to who changed his mind (if his mind had been made up) but he may have simply heeded the responses to the consultation that followed the July 2015 announcement, in which it was clear that most (if not all) respondents felt that the uncertainty and complexity that disincentivised pension savings was due at least in part to the continuous change in the system. If pensions tax changes again, pensions will continue to seem unattractively complex.
The lack of comprehension of the pension rights and available choices is still a focus for the Chancellor. He announced a Pension Dashboard product to be introduced by 2019, presumably to be adopted by all providers, to allow individuals to understand their rights under the range of different pensions they may accrue in their lifetimes. The Pensions Regulator has apparently been looking at this issue, and so is likely to be taking a lead.
He also announced proposals for a Pensions Advice Allowance (to be introduced following consultation), by which an individual will be able to withdraw up to £500, presumably tax free, from their DC pensions pot to pay for financial advice. This may be an acknowledgement that PensionWise, the pensions guidance offered for free and announced initially as advice by the chancellor two years ago with his Freedom and Choice pension reforms, is not able to fully equip individuals to make the complex decisions about their pension pots and retirement. PensionWise will no doubt be subject to some upheaval, as one of its two providers, the Money Advice Service (MAS) is being closed down, perhaps indicating that the Chancellor’s love affair with the concept is waning.
One love affair that continues, however, is Osborne’s delight in ISAs. It appears that he views the ISA as a clearer, simpler product than a pension (which it is) which therefore is more able to encourage saving. Of course, it also results in earlier tax receipts, which must always be attractive to the Treasury. The development of the new Lifetime ISA for the under 40s, including a bonus available only if the funds are used to buy a house or if they are kept in the ISA past the age of 60 and are used for retirement suggests an encouragement for retirement savings through ISAs, which draws parallels with the US savings plan known as the 401k, which is regularly used for pensions saving. Perhaps, having failed to change the tax treatment of pensions to become “pension ISAs”, the chancellor wishes to create them in any event, by developing ISA products to act as pensions. It will be interesting to see how successful these are.
In all, pensions have been left surprisingly alone. Even the use of salary sacrifice in pensions, challenged last year, has now been cleared explicitly for pensions and some other benefits, with the review and possible removal of favourable tax treatment being limited to other employee benefits.
It may be that Mr Osborne has been frightened off by backbenchers and the pensions minister, Ros Altmann. However, it may well be that pensions has ceased to be his focus, as other matters take centre stage. If this is the case, he is the first chancellor to feel this way for some years, and the pensions industry may be allowed to draw its first, tentative, sigh of relief.
Read the full article in Economia here.
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