Savers have faced the biggest shake-up to the pensions system in a generation under the watch of chancellor George Osborne. Many of the changes are controversial, and others have been announced yet not formalised.
But Brexit has put a spanner in the works – as negotiations over a deal with Europe under a new Conservative leader are going to be all-encompassing. It puts many of the planned changes under threat – and a cash strapped Treasury may turn to raiding the nation’s old-age savings once again.
Tom Selby, senior analyst at pensions provider AJ Bell, gives the odds on which parts of the pensions system can survive the Brexit carnage.
1. Death tax reforms to be reversed
The government recently announced it would allow pension savings to be passed on tax-free when someone dies before 75, and taxed at the recipient’s income tax rate after 75. But that may look generous in the post-Brexit world.
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While the reform was introduced with some fanfare by Osborne, and made pensions more attractive for tax planning, reversing it in these exceptional circumstances may be seen as a relatively uncontroversial way to raise cash for the Treasury.
2. Lifetime Isa delay
Widely believed to be a potential frontrunner to fundamental pension tax relief reform, the Lifetime Isa remains in the gestation phase and crucial details have yet to be clarified about how it will work. It’s designed to help people save for a first home or retirement, and contributions of up to £4,000 a year will be topped up by 25 per cent extra from the government.
But we still don’t know whether contributions above £4,000 a year will be allowed. The Treasury has also yet to confirm whether borrowing from the Isa will be permitted, and the criteria for accessing your pot penalty-free before age 60 haven’t been expanded.
Given these uncertainties, April 2017 now looks extremely ambitious as a launch date. That said, any move to ditch a policy likely to prove popular with younger voters disillusioned by the Brexit vote would be politically risky.
3. Cut to pension tax relief
The Treasury spends around £34bn a year on pension tax relief, so it will inevitably be part of any conversation about reducing government spending if the public finances suffer.
However, the future chancellor will weigh up the case for raising money for the Treasury against the risk of angering the electorate and Conservative backbenchers.
So while fundamental reform – such as abolishing higher-rate relief or introducing a radical pensions Isa system – may be off the table for now, further cuts to the annual and lifetime allowances may provide a more palatable alternative.
The government may also revisit plans to link the £1m lifetime allowance for pensions savings to inflation from 2018.
4. Secondary annuities market delayed or scrapped
This is a tricky one for the Treasury. On the one hand, reforms to allow people to trade in their annuities are set to be a big money spinner for the Exchequer’s coffers, so delaying or abandoning the changes will be costly.
On the other hand, it remains uncertain how the market will shape up or who will come forward as annuity buyers, while clarity has yet to be delivered on how advice will operate.
With civil servants set to be sidelined by Brexit negotiations, the future of these reforms looks wobbly at best.
5. State pension triple lock removed
The triple-lock, which guarantees the state pension rises with the highest of earnings, prices or 2.5 per cent, would have been in severe jeopardy had David Cameron followed through with his promised post-Brexit emergency Budget.
However, confirmation the “punishment Budget” will not happen, coupled with the fact that Brexiteers have pensioners to thank for their victory, makes removing this valuable benefit politically tricky.
6. Automatic enrolment pushed back (again)
The automatic enrolment genie cannot be put back in the bottle, since millions of workers have begun saving for retirement through a workplace pension for the first time. But a renewed period of fiscal retrenchment would likely mean the government reviews all of its spending commitments. Postponing planned rises in minimum contribution rates – as has happened before – would be an easy way to save money for the Exchequer and would likely be welcomed by businesses.
A more radical option would be to delay auto-enrolment for firms yet to reach their implementation date, or abandon it altogether for smaller companies. This would help businesses struggling to cope with the costs of complying with the reforms, but would fly in the face of the government’s policy agenda for pensions and add to the risk of millions of people not putting enough aside for old age.
7. Pensions Bill 2016 delayed
The Queen’s speech confirmed a new Pensions Bill will be unveiled later this year. The key elements include capping penalties for leaving pension funds early, improving protections for people saving in so-called master trusts, and restructuring how financial guidance in given.
Stronger regulation of trust-based pension schemes and ensuring savers have access to useful, relevant retirement guidance are both critical to supporting the UK’s pension system.
However, legislating for Brexit now becomes the priority for Whitehall, so it would be no surprise if the Pensions Bill was kicked down the road to make way.
Ultimately, which, if any, of these policies make it through the current hurricane of uncertainty and confusion depends on how the economy fares and who takes the helm following the Conservative leadership election.
But one thing is almost certain – the chaos wrought by the Brexit vote will continue to dominate the agenda throughout 2016.
Tom Selby is senior analyst at pensions provider AJ Bell.