Ahead of the Government’s Autumn Statement (22nd November), PensionBee, a leading online pension provider, shares its expectations and hopes for potential changes to policy areas such as the Mansion House reforms, Inheritance tax and the Lifetime Allowance.
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “With a General Election looming, it seems unlikely the Government would do much to upset any current or potential voters. The imminent need to win votes usually means a ‘hands-off the personal finances’ approach - or even big-ticket giveaways to attract voters.
As the cost of living continues to affect people’s daily lives, the Government will want to throw the kitchen sink at measures that sound like they might benefit people’s finances now and in the long term, even if in practice, the real-world positive impact of the move may be minimal.
The other reality is that the Government needs as much tax revenue as it can get right now, and with the scrutiny of the Office for Budget Responsibility over every decision, it’s going to be hard to get away with vote-winning moves that pass the test of being affordable.
“If it can demonstrate that an eye-catching tax cut is financially feasible, it’s possible the Government could go with something potentially popular, like inheritance tax reform.”
1. Mansion House reforms
“We expect - and need - more detail from the Chancellor on how the Mansion House reforms will work. These reforms, announced in July, seek to channel pension funds into unlisted UK companies to boost growth. As things stand, we don’t think the plans demonstrate clear benefits to all pension savers and want to see concrete proposals that make retirement outcomes the top priority, above the benefits to the UK economy of using pension money to fund investment. The risk of such plans going wrong would be borne by ordinary people trying to do the right thing by saving for the future and this should not be taken lightly.
Specifically, the Government should take the opportunity of the Autumn Statement to address concerns that pension fund investments into UK illiquid assets would be subject to higher fees.
To make the plans more attractive for everyone, savers included, it would be good to hear that further tax incentives for pension funds investing in UK private equity could be on the cards and also that fees for this type of investment will be negotiated down from their current, relatively high levels.
Until the deal becomes more favourable, we remain of the view that the net returns available would most likely not be better than current pension fund investment strategies and that the Government would have to pull out quite a few more stops before the reforms start to look like they are in the best interests of pension savers, who depend on sound pension fund investment strategies for decent retirement outcomes.
There is also a question mark over whether the use of funds would be used to meet the UK’s sustainability objectives. There has been scant detail on the type of illiquid investment the money would be used for and with carbon emission reduction targets to meet, not using the funds for this purpose would look like a big miss of an open goal.”
2. The State Pension Triple Lock
“There is a case to reform the way the Triple Lock works. It currently means the State Pension will rise either by inflation, earnings or 2.5%, whichever is higher. The Government is under pressure to make the cost of providing a State Pension more sustainable and it could possibly make the Triple Lock a double lock (linked to either inflation or 2.5%) or just link it to inflation to do this. This could take pressure off the Government to raise the State Pension age sooner than planned.
It’s vital that any reform preserves the value of the State Pension for future generations as well as today’s pensioners. Some form of index-linking is necessary for this. Without decent and reliable rises to the State Pension, it will be today’s young workers who suffer most when they reach their sixties and seventies, as personal and workplace pension savings are not currently at a level where they could even come close to replacing State Pension benefits. Any changes, if announced in the Autumn Statement, must acknowledge that the State Pension forms the majority of income for most retired households and the wrong change in the mechanism for rises could cause real hardship among the older generations.”
3. Pensions and inheritance tax
“Inheritance tax reform might be popular, but it also might not benefit that many households, in practice. There is a greater dependence on inter-generational wealth transfer than ever before among the younger generation, so enabling the passing on of more wealth from the ‘Bank of Mum and Dad’ to younger generations might be framed as a boost to younger families, although in reality it would be a boost to the younger generations of already relatively wealth families.
Reducing or even abolishing inheritance tax, as has already been rumoured, would also be interesting for pensions, as they are largely exempt from inheritance tax and some people use them as a store of wealth for this reason - to pass on wealth to family members tax efficiently. Reducing the inheritance tax burden could reduce some of the appeal of pensions for this specific, minority group who are using them as inheritance vehicles rather than for their retirement income.”
“The Chancellor blindsided the industry by announcing the scrapping of the Lifetime Allowance (LTA) for pensions, with effect from 2024, in the Budget earlier this year.
This was roundly welcomed as the LTA had previously been criticised for punishing diligent pension savers who had benefited from investment growth. However, there are some real complexities in the transitional arrangements and clarification over these would be welcome.”
5. Pension tax relief
“The tax advantages of pensions as savings vehicles are often suggested as something the Government might radically alter to generate more tax revenue and make the system fairer. For example, by introducing a flat rate of tax relief at either 20% or 30% and getting rid of higher and additional rate relief.
While there are good reasons to consider reform of pension tax relief to make it fairer and more of an incentive for those who most need a boost to their future retirement pot, altering this system is extremely challenging. And if changes to pension tax relief involved making pensions less generous for higher earners, it could alienate higher-rate taxpayer voters, which the Government would be keen to avoid.”