The Autumn Statement: Chancellor Shows No Sign Of Worrying About Savings Culture
by Dr. Ros Altmann
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- Welcome news that income drawdown restrictions to be relaxed
- Reducing pensions allowances still leaves good scope to build decent pension savings
- Great to see boost to infrastructure and construction
The Chancellor certainly did a much better job of managing expectations around his Autumn Statement than with the Budget earlier this year. There are some good bits, but also some significant disappointments for many. No nasty surprises like last time. However still no real recognition of the problems faced by savers.
The Good Bits:
- Increased maximum pension income from capped drawdown back to 120% of GAD.
- Encouraging Pension fund infrastructure investing is welcome.
- Encouraging construction investment and better capital allowances for small firms too.
- Maintained universal pensioner benefits is sensible as means testing is inefficient and expensive to administer.
- Consultation on changing discount rate for defined benefit pension schemes.
The Bad Bits:
- No incentives for pension savings for young people saving for a house.
- No change to Cash ISA restrictions.
- No incentives for people to save for later life care needs.
- Most taxpayers will face fiscal drag _ which is like a stealth tax – although lower earners are protected and this is less painful than tax rises.
- No respite for annuity buyers from the impact of lower gilt yields.
- No decision to remove mass means-testing from state pensions.
Great news – Income Drawdown restrictions relaxed: This is great news. At last the Chancellor has recognised the problems that pensioners who do not want to buy annuities have faced as a result of his April 2011 Budget changes, coupled with the Bank of England’s Quantitative Easing policy. Pensioners will now be allowed to take more income from their own pension fund – reverting to 120% of the GAD limits rather than 100%. In the past three years the Treasury and The Bank of England policy changes have slashed the private pension income of many retired people by more than a third, which has caused real hardship for thousands of prudent pensioners incomes have fallen sharply. Even though their own money is sitting in an account, they are not being allowed to spend it. This change will hopefully see these savers able to get back some of the unfair income reductions they have suffered. This will have the added benefit of bringing in more tax revenue and also help boost the economy by increasing spending.
But ISA restrictions have not been relaxed: He has missed the opportunity to help savers suffering from low interest rates by changing the cash ISA restrictions. Following falls in interest rates and overshooting inflation, which have eaten away savers’ income and capital, changing the measures to allow more freedom for ISA investors would have been a welcome relief to
both young and old savers.
We have been asking for changes to ISAs meaning that people, young or old, can choose whether to put all their annual ISA allowance in cash, or in stocks and shares, or both, with free transfers between each. It makes no sense to encourage savers to gamble on markets when so few can afford to take losses and, as interest rates are so low, having more of the income from their savings tax free is the equivalent of an increase in interest rates. It is therefore disappointing that these changes have not been made.
Why has the Chancellor overlooked our care funding crisis? While the Chancellor tinkers with our tax and pension systems in his statement, no thought has been given to one of the most pressing issues facing the UK – with an aging population how are we going to afford quality care? It is essential that people are encouraged to save for care they may need in later life. Why did the Chancellor not take the opportunity in this Statement to encourage people to address this issue, with incentives for investments which will help pay for adequate care? For example a special ISA allowance or Family Care Savings Plans for families to use to save up for care needs, free of tax, if the money is used for care for themselves or a loved one.
Even if care funding is radically reformed in the future, it is very likely that individuals will still have to fund a large portion of their care costs themselves so it is vital that we help people put money aside in case they need it.
The Chancellor is right to use pension assets to stimulate growth. The Government is looking at putting the money in pension funds to good use – rather than just buying gilts which does not help stimulate growth. Local authority pension funds have £150bn of assets. By harnessing this money and investing in infrastructure and construction projects, we will provide jobs now and encourage lasting growth in the economy. We need to find money to renew our creaking infrastructure, and also to increase construction of new homes. Pension assets are an ideal source of new investment funding for our economy and can provide funding for these job-boosting projects without much burden on the public purse. We need to make sure that the projects do now actually get started, the sooner the money is put to use, the sooner jobs will be created. Pension funds or local infrastructure bonds, for investors to be able to fund building projects, with a minimum return guarantee, would help provide better returns than gilts and also help pension schemes boost growth and offset their deficits.
Pensions tax relief – lower annual allowance and lifetime limit will not start till 2014 giving time to save more next year: It is understandable that the Chancellor has chosen to limit the amount spent on top earners’ pensions tax relief. Tax relief is meant to be an incentive to help people save for retirement, but it is hugely expensive and it provides the most incentive to the people who need it least. The highest earners get the highest incentives.
This change won’t come in until 2014 and many top earners may feel that they have got off lightly as it could have been worse for them in this statement. They will have time to put in more money next year and an annual limit of £40,000 is still generous.
My recommendation would be that we have an annual limit which is reviewed annually depending on economic circumstances. Perhaps the Chancellor would also consider merging the ISA and pension tax relief allowances to allow people to choose where they would like to save.
Welcome consultation on changing discount rate for defined benefit pension schemes: I welcome the consultation on allowing pension schemes to use a smoothed discount rate and giving the Pensions Regulator a duty to help employers who are at risk of bankruptcy. For the past few years, UK pension schemes have suffered significantly from the fall in gilt yields that has resulted in large part due to the Bank of England’s Quantitative Easing policy. Falling interest rates on gilts lead to rising pension liabilities and ballooning deficits. The impact of this is to weaken economic activity and had led more companies to have to plough money into their pension schemes, instead of into their businesses. It has also meant that many companies have found it more difficult to borrow; some have actually been bankrupted by their pension scheme obligations.
Importantly, many trustees of these pension funds have been encouraged to invest more of their money into the gilt market, in order to ‘de-risk’. But this sets up a vicious circle. The more the Bank of England forces long-term interest rates down by buying gilts, the larger pension deficits become and the more pension trustees feel obliged to buy extra gilts to cope with their deficits! This has meant that institutional investors end up competing with the Bank for scarce gilt supply and set up a spiral that hampers companies from expanding their operations and creating jobs. Given the exceptional nature of the policy of Quantitative Easing, and the extreme low levels which gilt yields have reached, coupled with the rise in inflation which has also negatively impacted pension funds, it makes more sense in these long-term pension funds to allow a longer-term measure of interest rates in order to measure their liabilities.
It is true that our pension regime does allow extra leeway to manage pension deficits in a scheme-specific manner with flexibility for the timescale of eliminating deficits, but the extent of the rise in liabilities reported in the latest actuarial valuations is hampering corporate performance now and this needs to be changed. I welcome the consultation that may allow companies to concentrate less on their pension obligations in the immediate term. This could also benefit the Exchequer, since some of the shortfall in corporation tax receipts has been due to companies paying much higher pension contributions than previously expected, partly due to QE.