Issues

Budget 2015 offers a potential boost for the pensions and investment market, contrary to what instant headlines suggest

26 March 2015

For the pensions industry the recently anticipated reduction of Lifetime Allowance (LTA) seemed to be the biggest blow. LTA is set to be reduced from April 2016 from £1.25m to £1m. It was of course dropped from £1.5m to £1.25m just a year ago. Bear in mind back in 2010/11 it was at £1.8m so we will see a near halving of the LTA within a five-year period. This is a good example of a policy which is politically astute because it looks like it’s a tax on fat cats only when in reality it is likely to have an impact on more and more middle-earners saving into a DC pension as time goes on. Experts estimate that a £1m DC pension pot will buy an inflation-linked income of around £28,000 a year; compared to £35,000 with a £1.25m LTA. You are better off of course in a DB scheme where a £1m pot still delivers a good £50,000 a year income.

However if one does end up going over the £1m pot size it’s okay until you trigger a Benefit Crystallisation Event (BCE). Withdrawing money however you do this is a BCE, even via UFPLS (Uncrystallised Fund Pension Lump Sum). Also when you reach 75 years this is considered another BCE but dying thereafter is not.

So for those of us living well over 75 years (again that is more and more of us) there is a strong potential that good asset performances could push pension pots well over £1m without a tax hit. Add to this the fact that new pension reforms allow you to leave your fund to whoever you fancy Inheritance Tax Free, and the combined changes suddenly make it much more attractive to keep healthy pensions invested and mitigate IHT by so doing.

Add to this the fact that, as annuity purchase ceases to become the default option for the vast majority at-retirement, many more retirement age individuals are likely not be buying one. Others will even be cashing in their existing annuities (now this has been announced in this Budget); it is entirely conceivable that providers will be looking after more pension assets post Freedom Day changes - albeit a lower percentage of these assets will be locked into an annuity.

This leaves a couple of ‘real’ threats for major name pension providers: the first being unscrupulous pensions liberation ‘sharks’ stimulating their policy holders to cash out altogether; and the second being the leaking of assets from higher charging legacy books onto D2C platforms unless they can agree systems for automating bulk migration of legacy scheme holders’ assets to more efficient, lower charging schemes perhaps operating on wrap platforms.

A lesser risk is that more long-term savings will be built up in ISAs instead. Several Budget announcements offered boosts to ISA-based saving. A major tax break was offered to first-time buyers if they save for the deposit on their first home in a new ‘Help to Buy ISA Scheme’. Essentially it means that for every £200 saved in this new Cash ISA, the Government will top it up by a further £50.

You need to open it with an £1,000 introductory payment. You can then save a maximum of £200 per month from the age of 16. So after 4.5 years you can expect to reach the maximum target of £15,000 (£12,000 saved by you and £3,000 handed out by the government) which is enough to cover 5.5% deposit on the average house today (the average UK house price in December 2014 was £272,468).

Most deposits are 10% or more still of course, so you will still need a partner committing to the same savings regime to get the right level of savings together. The other snag are that this is a Cash ISA so the chance to expose yourself to higher returns of Stocks & Shares ISAs is denied. Many think that in the absence of badly-needed increases in new housing supply, this handout will just mean that slightly more people will be chasing roughly the same number of houses, forcing prices up still further in a few years from now.

The other boost to the savings market came in the form of a new £1,000 tax free allowance on savings income. This was announced to encourage basic rate taxpayers to save more. Mind you to get the full benefit of this tax break; if only exposed to the miserly instant access savings rates where many of us have a few quid set aside; you would actually need to have more than £60,000 stashed away. Here’s a good example of a tax break which looks like it should benefit most of us but in fact it actually only likely to significantly benefit retirees (with less income but more savings in the bank) rather than the ‘squeezed middle’ who continue to struggle to save anything at all.

So the consensus is that this was a more politically-charged budget than normal from George Osbourne as one might expect just over a month from the General Election. The good news is that it is not all bad news for the pensions and investment world. There are more incentives to save for the long-term and some positives for tax planners and financial advisers to boot. This may come as some relief for an industry that is bracing itself for the seismic Pension Freedoms changes that were announced in last year’s spring budget.

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