Emergency Budget comment
by Dr. Ros Altmann
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Many of the important pension questions remain unanswered. On the big issues either the Budget announced a review or was silent. Possible interesting changes to state pensions down the line. No real help for savers or measures to encouraging saving.
- State Pension – interesting – reduce extent of means testing by increasing pension credit more slowly than Basic State Pension:
- State Pension Age – review
- Public Sector Pensions – review
- Private Pensions: NEST scheme – deafening silence
- Private Pensions: Flexibility – disappointing, no changes
- Annuitisation – good – Consultation on abolition of age 75 annuity requirement
- Pensions Tax Relief – Keep current mess but hope to change to annual limit
- Encouraging saving – nothing
- Capital Gains Tax – many will feel they have had a lucky escape
- Default Retirement Age – consultation to phase out, not abolition, disappointing
Details and comments
- State Pension – interesting, reduce means-testing a bit
The Chancellor has re-announced the ‘triple guarantee’ on the Basic State Pension that was in the Coalition Agreement. The current £97-65 pension will be increased from next year by the higher of price inflation, earnings inflation or 2.5%. This still leaves the state pension as the lowest in the developed world, but it should increase faster than would have happened otherwise. The Second State Pension will also rise by consumer prices in future. Pension Credit will gradually become less generous though, as it will only be increased by the same cash rise as the full basic State Pension. This will reduce the number of pensioners eligible for means testing and see a gradual narrowing of the gap between the full Basic State Pension and the Pension Credit. All the other pensioner benefits have been left unchanged such as Winter Fuel Allowances and free travel.
Comment: These measures may suggest some subtle changes in the state pension which may suggest a different direction of travel in future. By raising pension credit only by the same cash amount as the increase in Basic State Pension next year, the Government will be reducing the gap between the National Insurance pension and the means-tested Pension Credit. For example, if the Basic State Pension rises by £3 a week, or 3.1% next year, the same cash increase would increase the Pension Credit by £3 a week which is an increase of just 2.3%. If these changes were repeated over many years, eventually the state pension would rise to the Pension Credit level as the Pension Credit becomes relatively less generous and State Pension becomes more generous, thus addressing one of the big problems of suitability for private pensions. However this will take a very long time to achieve – probably 10-15 years, and it would be better to move to a flat rate, more generous pension much more quickly.
- State Pension Age – a review to accelerate increase
The state pension age rise will be accelerated, although again we have no detail on this. Before the Election the Tories promised a review on this issue, which will be carried out quickly, with a call for evidence being launched ‘shortly’, so it is likely that we will have more news over the coming year.
Comment: The higher state pension age will offset some of the cost of increasing the generosity of the Basic State Pension. Later retirement is inevitable and good for most older people, but it has to be tied with ending age discrimination in the workplace.
- Public Sector Pensions – a review
A Review chaired by John Hutton will deliver an interim report on changes to public sector pensions by September and a final report in time for next year’s Budget. One cost saving measure announced in this Budget, however, is that the increase in public sector pensions in payment will rise in line with consumer prices index, not retail prices index, as this will be the measure used for increasing State Second Pension.
Comment: We need urgent action on this issue. Taxpayers and the workers themselves need to finally find out the truth about the costs and future commitments of these pension arrangements. This requires expert input with detailed pension knowledge. Public workers will clearly be told there is a choice between jobs and pensions. There will be major industrial unrest on this issue, that seems inevitable.
- Private Pensions – NEST – deafening silence
This subject was conspicuous by its absence. Absolutely nothing was said about what the Government’s plans are for auto-enrolment and establishing a national pension scheme.
Comment: Deafening Silence! It is surprising that nothing was announced about what will happen to this national pension scheme. It suggests there is still disagreement over what to do. No review was announced, but a decision must be made about whether to continue with this policy because the next phase of the administration project has to be signed by October. I presume there will be a review over the Summer with an announcement ahead of the spending review.
- Private Pensions – Flexibility – no news
Comment: No measures were announced about improving the flexibility of private pensions. The Coalition has talked in the past about trying to make pensions more attractive, by allowing people to make some withdrawals, rather than forcing them to keep the money locked till retirement but it seems that they are not even ready to review or consult on this yet. It would be a potentially attractive measure to encourage more pension savings in the first place.
- Annuitisation – consultation to abolish age 75 rule
Again, a consultation is being launched shortly to identify how to change the current requirement that forces people to buy an annuity with their pension savings by age 75. The Chancellor has also announced that there will be transitional measures for those who have not yet bought an annuity but reach age 75 before new measures are announced.
Comment: It is welcome that the requirement to buy an annuity will end, and also good to see transitional arrangements in place. I hope that the consultation will consider ending forced annuitisation for everyone, not just those with biggest pensions.
- Pensions Tax relief – find ways to change to annual limit (around £40,000?)
The current dreadful plans to change the pension tax relief regime for all those earning over £130,000 a year have been left unchanged. The Chancellor says he will consider replacing this with an annual limit instead, but has challenged the industry to come up with a limit that will still raise the £3.5billion extra revenue that is expected from the current plans. The Budget indicates that this would suggest an annual limit of between £30,000-£45,000 contributions and the Government will look to employers, pension schemes and other interested parties or experts to help decide the best way forward.
Comment: The industry and employers are being challenged to come up with a pension contribution regime that will still raise the same revenue expected from the complex mess of current measures. An annual limit seems most likely, but it could be closer to £30,000 a year, rather than the £50,000 a year that others have been calling for.
- Encouraging more Savings – no new measures
The Government will introduce a national financial advice service from Spring 2011 and has asked the Consumer Financial Education Body to develop a new annual ‘family financial healthcheck’. There are no details on this, but the idea is very welcome.
The Savings Gateway, due to be introduced in July 2010, will not go ahead and Child Trust Funds will be abolished.
Comment: The Budget talks about encouraging saving, but no new measures are announced to achieve this, indeed abolishing Child Trust Funds and Savings Gateway will have the opposite effect.
- Capital Gains Tax – lucky escape for many
The Chancellor announced there will be no CGT changes for those paying basic rate tax, with the 18% tax rate and the annual exemption limit staying the same. Those on higher rate tax will pay 28%.
Comment: This could be seen as a lucky escape for many savers, who were afraid their capital gains tax bills would suddenly soar. Many older people will be relieved that they can still use a buy-to-let property to fund their retirement income. For example, if they sell after they have retired and move onto a lower tax rate, they will not be hit by extra capital gains tax.
- Default Retirement Age – disappointing, this should be abolished
Very disappointingly, the Chancellor just announced that there will be consultation on how it will quickly phase out the Default Retirement Age, which allows employers to sack people as soon as they reach 65, without any good reason.
Comment: I would have hoped that the Default Retirement Age would have been abolished immediately. This ageism should have been outlawed long ago and I hope that the result of the Consultation will be to abolish the Default Retirement Age altogether, rather than ‘phasing it out’. Older people both want to and need to work longer, they are fit and healthy and most are capable of working well past age 65. This age discrimination in the workplace should be ended as soon as possible.
Dr. Ros Altmann- 07799 404747
22 June 2010