To many analysts’ surprise, Philip Hammond did not reduce pensions tax relief (PTR) in the last Budget.
Yet this particular investment incentive is directly in the firing line for the future.
Former Pensions Minister Steve Webb was convinced that PTR would be reduced at the end of last year, telling the Chartered Institute for Securities and Investment’s annual financial planning conference that Hammond needed “to raise all the money he hasn’t raised, plus the economy is slowing, plus the spending pressure.” Webb, who is now a financial advisor with Royal London, said “[Hammond is] unlikely to raise the headline rates of income tax, national insurance or VAT, so where’s he going to look for money? Tax relief on pensions.”
Currently, you can claim tax relief on the income you put into pensions credited at the rate you pay income tax – albeit with both annual and lifetime limits. However, the cost to the Treasury of retirement savings incentives now stands at £38.6bn. With Webb’s observations in mind, pension tax breaks for the wealthier saver are a likely, if politically sensitive, target.
Should we expect this to be looked at again come this November? The answer is yes – but possibly no, as we will see. Last month, DWP spokesperson Baroness Buscombe said the Government would “examine the process for payment of pensions tax relief.” This was aimed at addressing the sense that pension tax relief is skewed in favour of higher-paid workers. Quoted in the Daily Telegraph, pension firm AJ Bell said that as a result of the Prime Minister’s £20bn funding promise to the NHS, savings investments like PTR will be “caught in the crossfire.”
From the point of view of the saver, minded to be prudent and prepare for their retirement, this is unfortunate news. What should affected individuals do? For those reliant on PTR, it is worth calculating how much you stand to lose against expectations were it to be reduced to a flat-rate system of 25 or 30%; it would also seem advisable to pay in as much as possible now, according to Nathan Long, a senior pensions analyst at Hargreaves Lansdown, and “make hay while the sun shines.”
PTR has already been eroded over the past few years, with a series of cuts including a reduction of the lifetime allowance to £1 million (from £1.8 million) in 2012. Similarly, the annual allowance was £255,000 in 2011 but is now £40,000. “Pensions should be long-term business,” says Steve Webb, and the number of cuts “undermines confidence in the system.”
More widely, it is likely that extensive pension reform will, eventually, take place. Office of National Statistics figures indicate that the UK population in 2016 was at its largest ever (65.6 million) and projected to reach 74 million by 2039. “Improvements in healthcare and lifestyles leads to an ageing population; in 2016 in the UK, 18% of people were aged 65 and over and 2.4% were aged 85 and over,” the ONS data shows.
“This has led to planned increases in National Insurance contributions – which were swiftly u-turned in 2017,” says Lucy Cohen, Commercial Director, Mazuma Accountants. “It’s also led to a series of increases in retirement age – and uncertainty about what we’ll actually receive when we get there.” Cohen sees today’s pension scenario as something of a time bomb, especially for younger workers. “We have an ageing population. Put simply there are more old people per young person who is working than there has ever been – and this is a trend that is set to continue.”
Specifically talking about state pensions, Cohen points out that “it’s the working generation that funds the retired generation – each working generation pays for the generation above them. What happens when the retired generation’s economic needs start to outstrip the resources provided by the working generation?” We end up with the current problem, Cohen observes, of the Government wanting to address pensions but struggling politically.
“Pension providers and employers need to consult in a serious way to educate millennials about the need for a private pension plan,” Cohen says. This needs to be combined “with other retirement finance options if they are to have any chance of allowing future generations to stop working and have any form of retirement.”
George Osborne considered major pensions reforms when he was Chancellor in 2015, but backed away from doing so; arguably, the current Government’s reduced majority means it is in a less powerful position to do more than tinker with the system.
“MPs have no idea how to resolve the ongoing changes to pensions relief,” argues Ian Hunt, Legal Consultant at East Devon Law. “There has been a huge push to urge people to take on pensions – whether that’s workplace pensions or private ones. The combined effects of people living longer, changing demographics and fewer full-time employees means that pensions can’t cope.” By around 2030, Hunt says, there will be more people aged over 65 than there are under 16. Those workers of the future will not be able to contribute enough to keep the state pension buoyant. “So there’s pressure to address the gap – but penalising those who have saved by reducing incentives to do the very thing they are encouraging – this does not seem the way ahead. It’s a dilemma.”
Looking further ahead, it might be reckoned that as the baby boomer generation declines, so the imbalance in pension requirements will also decline. But the incoming workforce is not making up the difference. “The proportion of children in the UK population has declined from over 24.5% in 1976 to 18.9% in 2016,” according to the ONS. “This proportion is projected to decline even further in future years.” Regardless of how PTR is addressed, the pensions time bomb is not going to go away any time soon.
Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.