Pensions - Articles - Autumn Budget bucket list for pensions and savings


Commentary from Steven Cameron, Pensions Director at Aegon, which lays out Aegon’s bucket list for pensions and savings and ‘levelling up’ measures ahead of next week’s Budget.

 Now’s the time for targeted interventions, not tax tinkering or radical reform of pension tax relief

 • Complex pension tax relief reform would be highly challenging to implement amongst many other pension priorities
 • An increase to Money Purchase Annual Allowance would benefit over 55s caught unawares by pandemic
 • Solution to ‘net pay’ anomaly well overdue to ‘level up’ pensions tax relief for low earners
 • Opportunity to drop or amend controversial proposals around implementing increased Normal Minimum Pension Age

 Pension Tax Relief Reform
 “With so many pension priorities and changes being advanced, the Autumn Budget is not the time for a radical reform of pensions tax relief. A move to a flat rate of pensions tax relief, rather than the current system where relief is based on the rate of income tax paid would be far from simple to implement. It would be particularly challenging for defined benefit schemes and could mean medium to high earners including doctors in public sector schemes face big tax bills. It would only benefit the Exchequer if the cuts in incentives for higher rate taxpayers were greater in total than any increased incentive for basic rate taxpayers. There are no quick wins here for the Chancellor, change would be very complex and any savings for the Exchequer from less tax relief would take significant time to realise.

 “In his Spring Budget, the Chancellor froze the lifetime allowance, the maximum an individual can save in their pension on a tax favoured basis. Over the 5-year freeze, growing numbers of medium earners as well as higher paid will hit the maximum they can save in a pension with tax breaks. This reduces the justification for making other cuts in incentives for higher rate taxpayers.

 “Currently, the Government is pushing those running defined contribution pension schemes to make significant changes to where they are investing members’ funds to address climate change and to invest more in infrastructure and start-up companies to turbo-charge the economy. Reducing tax incentives for many pension savers risks sending out mixed messages.

 Pensions tax tinkering
 “Many a Chancellor has considered radical reform to pensions tax relief, before putting in the ‘too hard’ pile and embarking instead on a series of typically unwelcome pensions tax tinkering. However, there are some targeted interventions which would be particularly welcome around the Money Purchase Annual Allowance, ‘net pay’ schemes, the increase in the Normal Minimum Pension Age and auto-enrolment enhancements.”
  
 Over 55s caught unawares by Money Purchase Annual Allowance
 “As individuals seek to rebuild their retirement savings post pandemic, perhaps after a period out of work, many might need the flexibility to pay in larger sums. But the little-known Money Purchase Annual Allowance means anyone over 55 who has accessed their pension flexibly, perhaps to support them during lockdown, has a limit of £4,000 a year on what they and their employer can pay into a defined contribution pension. Many will be caught unawares and we’d welcome this being increased to at least £10,000 to give individuals more freedom to get their retirement planning back on track.”
  
 Net Pay Anomaly
 “The Government needs to deliver on its commitment to address the ‘net pay’ anomaly which means non-taxpayers in pension schemes which have opted to administer tax relief on what’s called a ‘net pay’ basis lose out compared to those schemes operating the alternative ‘relief at source’ approach. HMRC grants non-taxpayers in ‘relief at source’ schemes basic rate tax relief but their counterparts saving in net pay schemes receive nothing, which means they are effectively losing out. Resolving this would be a welcome ‘levelling up’ measure for the lowest earners.”
  
 Normal Minimum Pension Age
 “The Budget and accompanying Finance Bill provide an opportunity for the Treasury to drop or amend controversial proposals around how to implement an increase in the Normal Minimum Pension Age. This is the earliest age when people can typically access their pension and with a few exceptions, is due to increase from 55 to 57 from April 2028. But proposed transitional arrangements risk decades of complexity for pension schemes and their members.

 “The Treasury has been seeking to ‘protect’ a small minority of individuals who are in schemes whose rules by sheer accident of history give an ‘unqualified right’ to take benefits at age 55. While well meaning, these protections would create horrendous complexity and multiple unintended consequences for little real benefit. The pensions industry is united in calling for a radical rethink to keep things simpler and fairer across the board, while helping pension savers understand their entitlements so they can plan for their future.”

 Auto-enrolment reforms
 “Those earning less than £10,000 in total or those with multiple jobs all paying less than £10,000 currently miss out on being automatically enrolled into a workplace pension with an employer contribution. For them, changing the rules and thresholds here would offer a valuable step up in their pension savings. Women are more likely than men to fall into this trap so a change here would also help ‘level up’ and reduce the gender pensions gap.”
 
 Provide details and engage financial services industry on social care funding deal
 • ‘Care cost jam jars’
  
 “Last month, the Government unveiled its long overdue new deal on social care funding, a major announcement which in more normal times might have been the jewel in the Budget crown. The headlines include a cap of £86,000 on how much anyone will have to pay for care costs and an increase in NI to help pay the Government’s share of the extra costs, but there’s much more detail to be thrashed out.
  
 “The care cost cap, albeit with extra costs for ‘residential’ room and board, gives individuals greater certainty to plan ahead for possible care costs while protecting inheritance aspirations. We hope the Budget announces a consultation on how the financial services industry might help people plan ahead, with care insurance a possible approach although costs might be high. Some people might prefer to build up savings in a ‘care cost jam jar’, possibly within their pension, so they have the funds available if they need them. It’s increasingly common for people to keep their pension pot invested into retirement, drawing a regular income, and they could keep their jam jar savings ringfenced here too. We expect many people will want to seek financial advice so they know they’re doing the right thing in this new area.”
 
 Self-employed crying out for ‘levelling up’ of their pensions
 “Something dramatic needs done on pensions for the self-employed. While auto-enrolment has successfully boosted the retirement savings of millions of employees, the self-employed are not included and with every year that goes by, they are falling further behind their employed counterparts. With auto-enrolment reaching its 10th anniversary next year, finding solutions to encourage default retirement savings for the self-employed would be a huge step towards ‘levelling up’ pensions for this vital and growing part of the workforce.”
 
 Chancellor must avoid third round of income tax and NI increases
 “The Government has spent a huge amount supporting individuals and businesses throughout the pandemic. The Chancellor has always been clear that this will have to be paid for, and while growth initiatives will help, tax increases were inevitable, even for a Conservative Government.

 “In his Spring Budget, the Chancellor froze till April 2026 the thresholds at which individuals start paying basic rate and higher rate income tax, rather than increasing with inflation. This means as individuals’ earnings increase, they’ll pay income tax on a larger proportion of these earnings and more will cross into paying higher rate income tax, leading overall to a higher income tax burden.
 “On top of this, the social care funding deal means individuals alongside employers will pay an extra 1.25% in National Insurance from April 2022, becoming a separate ‘levy’ a year later.

 “While Government finances look challenging for the years to come, and with the prospect of a winter of sharply rising prices, we’d hope the Chancellor will avoid a third round of income tax or NI hikes in the October Budget.”
  

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