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What the Budget should say...

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This year the usual anxious speculation about what damage the next Budget might do to UK pensions has been exacerbated by Treasury kite-flying in the press. It might seem we are being led to expect something dramatic, so that when a slightly less swingeing cut is announced the industry breathes a sigh of relief.

I don’t want to add to the froth about what might occur; rather to talk about what should happen. Because there are some changes which are overdue and need to be made.

First, a solution for the net pay scandal. Low earners who pay no income tax - in 2019/20 those earning more than £10,000 but less than £12,500 pa – are still being auto-enrolled into net pay arrangements and receiving no tax relief on their pension contributions. HMRC's most recent data shows that for the tax year 2016/17, there were 1.33m such individuals.
Prodded by the Office of Tax Simplification last October, which recommended that the Government should attend to this, the Conservative Party’s 2019 Manifesto committed to “a comprehensive review to look at how to fix this issue.” They already know what should be done: the Chartered Institute of Taxation’s Low Incomes Tax Reform Group told HMRC two years ago how it could use RTI data to provide tax relief through an annual reconciliation process. So they should get on and do it.
The second thing on the ‘to do’ list, about which the Government has already promised to announce something, is the effect of the tapered annual allowance on some doctors’ pensions. It should simply be abolished. There’s no way of putting lipstick on this pig which won’t raise claims of unfair treatment from other pension savers.
However, we know why the taper was set up: the same driver lay behind the introduction of the £10k money purchase annual allowance, and its subsequent reduction to just £4k. The Government wants to slash the amount of tax relief on pension contributions. Trouble is, the bulk goes on employer contributions, especially those to Defined Benefit schemes – and a big chunk of that is for deficit reduction. Cutting tax relief on individual pension contributions is not going to cut the mustard.
So what the Government should announce, alongside scrapping the tapered annual allowance, is a new Pensions Commission, independent of Government, to review the whole business of retirement saving and how it can be most effectively incentivised. Better still, a Later Life Commission could factor in the thorny issue of funding for long-term social care, a problem for which we have been awaiting a Green Paper for two years and counting. What’s desperately needed is a holistic, integrated approach to the whole subject of funding for life after work.
We’d also like to see published, among the Budget’s supporting documents, some concrete proposals from HMRC to assist those struggling to understand how to implement GMP equalisation. We don’t have to wait for judgment on the second Lloyds Banking case to move forward on issues like the possible effect on protections where the conversion method is chosen.
There is also the looming conflict between pensions flexibility and defined benefit transfers: pension scheme members encouraged by the former (the now rather notorious 2014 Budget announcement by George Osborne) are being frustrated by regulatory actions against the latter. The Treasury needs to work with DWP and the regulators to dampen down what presently has all the signs of becoming the next pensions mis-selling scandal – as if we could afford another one.
Besides acknowledging some responsibility, the Chancellor should announce what the Government will do to reduce the so-called ‘advice gap’. Independent financial advice is mandatory for transfers worth over £30k from defined benefit to money purchase schemes, such as SIPPs. This can easily cost the member £3,000 and if the FCA bans ‘contingent charging’ as seems likely, it will be even harder to obtain anyway. Legislation which presently restricts the role of employers in facilitating and funding advice should be amended.
If the new Chancellor really wanted to make his mark, he could announce seed funding for a more radical solution to the unavailability of financial advice: a National Wealth Service (NWS), which I have proposed in this column before. Modelled on the NHS, the Citizens Advice Bureaux and the existing Debt Advice Service, this could be a real game-changer for financial well-being.
Ian Neale
Director, Aries Insight