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Industry calls for simplified pensions ahead of Autumn Statement

21 November 2016

Investment professionals outline what they hope chancellor Philip Hammond will address in his first major economic announcement on Wednesday.

By Lauren Mason,

Senior reporter, FE Trustnet

Chancellor Philip Hammond should reduce the complexity of the pension system and focus his attention on controversial policies such as the state pension triple lock, the lifetime allowance and the Lifetime ISA, according to a selection of investment professionals.

This comes two days before the chancellor’s Autumn statement, which will be his first major economic announcement since taking the reins from George Osborne in July this year.

While it seems to be agreed that Hammond won’t make any hugely significant announcements – the consensus being that he will save these for the full Budget in spring – experts have called on him to tackle what they deem to be overly complex reforms that have been introduced over recent years. 

In the below article, we look at three of the hottest topics of debate when it comes to pensions and what the professionals would like to see come out of the Autumn Statement on Wednesday.


State pension triple-lock

The pension triple-lock – which is the annual increase of the state pension by the highest out of either inflation, the increase in average earnings or 2.5 per cent – was introduced by the coalition government in 2010 in a bid to ensure retirees aren’t out of pocket.

However, the policy has come under fire from many industry commentators for being unsustainable over the long term and favouring the ‘baby boomer’ generation over the ‘Millenials’. 

Toby Selby, senior analyst at AJ Bell, says the policy is “doomed” over the long term given that the Work & Pensions Committee recommended scrapping the policy.

“One potential get-out would be to expand the independent Cridland Review of the state pension age to include an evaluation of annual increases,” he said. “This could take some of the electoral sting out of a hugely unpopular policy move.”

Tom McPhail, head of retirement policy at Hargreaves Lansdown, agrees that the Cridland Review – which will scrutinise the current state pension age – will provide a “handy scapegoat” for any decisions made by the chancellor in this area.That said, he points out that the policy will have to be scrapped at some point given its unsustainability – it is simply whether Hammond decides to do this now or worry about it later.

“The triple-lock is a difficult policy to unpick. To do so would be to remove a totemic benefit from a cohort of the population with a high propensity to vote,” he explained.

“The DWP Select Committee has recently published a report arguing for a move to a double lock involving an earnings link with an inflation under-pin and the ditching of the 2.5 per cent element.

“There is no doubt that the triple-lock is not sustainable in the long term; by definition it would mean transferring an ever greater share of national wealth to a minority, to the detriment of the majority.”

Matthew Philips, managing director and head of wealth management at Thomas Miller Investment, added: “The pension triple-lock should be abandoned as it has done its job of addressing pensioner poverty and should be replaced with uplifts in line with average wages for the state pension. 

“This should address some of the issues around intergenerational fairness and free up some future budget to help working families.”

The Lifetime Allowance /annual allowance

The Lifetime Allowance – the limit on the amount of pension benefit that can be drawn from pension schemes without incurring extra tax charges – has gradually decreased since 2010 from £1.8m to £1m.

This has been an unpopular decision among many, especially seeing as the annual allowance – the limit on the amount an investor can put in their pension pots per year tax-free – is being tapered for those with an adjusted income (including the value of any pension contributions) – of £150,000.

Many investment professionals believe that these policies send out mixed messages when the government should be encouraging people to save back as much money for retirement as possible.

Mike Fosberry, director in financial services at Smith & Williamson, said: “If the government wants to encourage sensible pension planning, it could simplify things slightly. There is no sense in drastically reducing the maximum level of contributions which can be paid whilst at the same continuing to reduce the lifetime allowance which is now set at £1m.”

“The annual allowance is a limit to the total amount of contributions that can be paid to a pension scheme each year; it currently stands at £40,000. The Lifetime Allowance is a limit on the maximum amount that can be paid in to a pension over a lifetime, it has been reduced drastically over the past few years and currently stands at £1m.

“At current annuity rates this will not provide an index linked pension of much more than £20,000 per annum. The message seems to be to leave pension planning until the last minute which is hardly prudent.

“If, as a country, we are serious about planning for our future we should have just one limit.”

There are a number of ways that industry professionals believe Hammond can resolve the situation, one of which being to lose the Lifetime Allowance altogether.

David Newman, head of pensions at Close Brothers Asset Management, said: “Scrapping the Lifetime Allowance would certainly be a step in the right direction, ending a punitive tax that undermines the concept of long-term, sensible investment for retirement. However, this is unlikely, given the chancellor would need to forego future tax receipts from those who have exceeded their allowance already.”

Instead, many professionals are calling for the tapering of the annual allowance to be scrapped as it overly complicates matters and leaves people unsure how much money they will be left with in retirement.

Thomas Miller Investment’s Philips said: “We would like to see the tapering of pension’s relief abandoned.  It is totally unworkable and overly complex, and again sends out the wrong message on pensions. 

David Fairs, pensions partner at KPMG in the UK, agrees that the annual allowance needs to be overhauled.

“The tapered annual allowance has been causing huge complexity and cost for business where there are significant numbers of employees whose base pay is above £70-80,000 per annum as it’s impossible for employees and employers to work out how much they can pay into pensions until the year end,” he reasoned.

“Paradoxically, those who have an annual allowance of £40,000 (typically those who earn up to £80,000 per annum) couldn’t possibly afford to put that much money into pensions, whereas those that might have enough disposable income to think of doing that (those earning over £210,000 per annum) have an annual allowance of just £10,000 per annum. 

“We might well see removal of the tapered allowance but with that would come a much lower annual allowance – perhaps £20,000 for everyone.” 

Lifetime ISA

A third major focal point for investment professionals ahead of the Autumn Statement is the Lifetime ISA or LISA, which will be available to those between the ages of 18 and 40 from April 2017.

As with the previous ‘Help to Buy’ ISA, the government will add 25 per cent to savings each year – investors are allowed to save up to £4,000 per annum. LISA owners can then choose to either use this money to buy their first home, or keep hold of it until the age of 60. If the investor chooses to take their money out before this point, they will be charged a 5 per cent exit fee.

Hargreaves Lansdown’s Tom McPhail said: “In spite of recent form for ditching legacy policies, I do expect the Lifetime ISA to go live in April next year; with all the talk about intergenerational inequality, it would be a hard one to ditch.

“The legislation is well on its way through parliament, it has been through committee and is heading towards its third reading.

“It may not be a great addition to the ISA stable and in the long term we at Hargreaves Lansdown would like to see it rolled into one big Super-ISA but for now, we hope and expect that it will go ahead in April 2017.”

AJ Bell’s Tom Selby added: “It feels like the Lifetime ISA is too far down the road for major changes but it has some vocal critics, including two former pensions ministers so it will be worth keeping an eye on any surprise changes to the rules. 

The exit charge seems overly punitive given that exit fees have been capped at 1 per cent for pensions and the maximum age requirement of 40 restricts the product from some core groups that could benefit, such as the self-employed.”

Despite causing some controversy, not everybody believes the Lifetime ISA proposals need an overhaul.

“The Lifetime ISA is a golden opportunity to encourage younger people to invest for their future, often with the support of their family,” Darren Cornish, director of customer experience at The Share Centre, said.

“Instead of rowing back on the Lifetime ISA, as some reports suggest the Chancellor is considering, we would urge him to reiterate the government’s commitment to launching it in April 2017.”

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