Articles - The Young Ones

An Autumn Budget looms in November and the pensions industry is expecting change. A quick recap of where we are. Philip Hammond flipped things around to return the Budget to the Autumn and so we are blessed to have two Budgets in one year as we’ve already had a Spring budget. In the spring the Government largely left pensions alone, which many were relieved about.

 By David Brooks of Broadstone muses on what the Chancellor might do with Pensions in the Autumn Budget.
 The two key take-aways from the previous budget were: 
 • The revelation of the “success” of pension freedoms with the government raising its expectations of receipts from people accessing their pensions in a flexible way. The expectation of tax revenue for 2017/18 was increased to £1.6bn from an initial estimate of £910m made in 2014.
 • The second was the attempt to increase National Insurance receipts from the self-employed which was embarrassingly U-turned shortly afterwards as it contravened the Conservative’s latest manifesto.
 So what’s on the agenda for the Autumn Statement?
 When making the announcement of the date of the Autumn Budget to the 1922 committee the Chancellor made an appeal for ideas to appeal to young people in a bid to address the exodus of young voters to the Labour Party. It was reported that he told MPs that their generation have small debts and comparatively generous pensions but younger generations are leaving university with debts, little in the way of savings and their prospects to build a decent level of pensions is reduced.
 It has been reported that in order to avoid any embarrassing U-Turns the Chancellor has been running the idea of a “tax on age”.
 The upshot of this would be a reduction in pension tax relief for older workers while those in their 20s and 30s would see a reduction to their National Insurance Contributions.
 So how might the Chancellor do this?
 Age related tax codes for tax relief – this could be complex and unclear. It may create cliff-edges and division. If not placed right those who feel they should be getting the benefits that others have enjoyed may feel hard done by. However, it could also be seen as a gift to the young, if a cynical one. Younger people could see themselves given a larger tax relief boost to their pension savings when they are least able to save and yet when the time comes to increase savings the government bonus is reduced. The more I think about this idea the least likely it feels that it will be used.
 Such a change would also run the risk of affecting middle-aged people with a large cohort still without decent pension provision and perhaps saving for the first time through auto-enrolment. To presume all over 30s are in a good place with their retirement savings is too simplistic.
 Single rate relief – this would not, necessarily, address the age issue precisely but would give tax relief a more level playing field.
 Higher rate tax payers would lose out while basic rate tax payers would get a boost. There are some complications to work through.
 This idea has been kicking around for a number of years and while potentially it has some complexities it is so familiar and so often discussed that it has lost some of its sting and may be welcomed by many in the industry as the fairest thing to do.
 Changes to tapered AA – the earnings parameters could be reduced to capture more high earners. This could easily be packaged as something attacking older workers as the ones most likely to be earning those larger sums.
 Review of taxation of DB – it is evident that the clearest difference between the ages is access to DB pension savings (at least in the private sector). One method could be to review the valuation of DB pensions when coming into payment. The current factor of 20 bears little comparison to the way DC savings are measured. Changing the factor to something like 25 would increase the government’s tax take on those retiring in excess of the Lifetime Allowance. This would be deeply unpopular amongst public sector workers now thrust over the Lifetime Allowance.
 National Insurance on pensioners – one of the simplest ideas is to introduce a further tax (via NI) on wealthy pensioners. However, this may cut to the core of the conservatives base and prove unpopular. Although perhaps not so hard done by as to vote for Jeremy Corbyn.
 Give the Lifetime ISA some steroids – the simplest option would be to make LISA more attractive. Boost the government’s bonus to 25% or 30% and perhaps review the occasions the money can be used.
 What will happen?
 I think two things will happen resulting in almost immediate changes and a third will be consulted on.
 1. LISA will be adjusted. The Government will boost the bonus it gives on contributions, it may even increase the levels and perhaps review when the funds can be used.
 2. The earnings bands for the taper will be adjusted so that the taper will apply to more and so increase tax take for those that exceed, or more accurately, changing behaviours so the tax relief isn’t give in the first place.
 3. A consultation on the future of tax relief to introduce a single rate tax relief on pension contributions with a view to it being introduced in 2019.
 The government needs to do the simple things now (after all Brexit and a small majority is making life hard) to be able to make some good noises to the young voters in the simplest way. Tweaking existing measures is by far the path of least resistance.

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