According to some reports, tomorrow’s Autumn Statement could be both the first and last for the new chancellor, because Philip Hammond is said to be in favour of sticking to a single annual Budget.
We’ve become used to the biannual format, with a fresh set of policies emerging from the chancellor’s red box twice each year. George Osborne was the master of pulling surprises from the box, particularly when it came to pensions, and in recent years we’ve seen a string of policy changes.
Some, like the pension freedoms, have gone down well. Others, such as cuts in the pension lifetime and annual allowances, have been more about saving the Treasury money than about retirement. The Lifetime Isa is yet to go live and we now know that the secondary annuity market has been scrapped over concerns around consumer protection.
One worrying theme is that while pensions are very long-term investments, they can be seen as a quick win for politicians looking to make an impact.
With the long term in mind, it’s worth taking a step back. Rather than looking at the policies, we should examine some of the changes affecting pensioners today, particularly because a fairly dramatic shift has occurred.
A different landscape
In 1979, 43 per cent of those on the lowest incomes in society were pensioners. Today that figure has fallen to just 13 per cent. Not only have pensioners been catapulted out of the lowest band of incomes, they have begun to close the gap on the working population.
After housing costs, where increases have hit younger generations hardest, the weekly incomes of the working population are just 7 per cent higher than those of pensioners today.
Adjusted for inflation, the average pensioner household has seen their weekly income increase from £372 to £515 since the start of the century.
In Aegon’s view, there are three main factors behind this rise. First, today’s pensioners have benefited from the proliferation of defined benefit pensions set up in the sixties and seventies, but which are increasingly closed to new entitlements in the private sector. Second, state benefits for pensioners, including the state pension, have been protected and account for £214 of pensioner households’ incomes. Third, an increasing number of older people are working part time in what we traditionally called retirement years, providing themselves with some valuable additional income.
Don’t be hasty
A chancellor keen to make his mark might conclude from this that many pensioners have relatively broad shoulders, and could perhaps bear a little more of the tax burden or a reduction in benefits. We’d argue that the chancellor needs to think further ahead and ask whether the trends which have made today’s pensioners relatively well-off are likely to continue.
While the number of older people in work looks likely to rise, it’s increasingly clear that the golden age of generous defined benefit schemes within the private sector are well and truly over. While many individuals retiring in the coming years will still have a significant defined benefit entitlement from past periods, we believe the amounts that those retiring in future years will receive have already levelled off, and we should expect them to begin to drop over time.
While the growth of defined contribution pensions and auto-enrolment will offset some of this decline, people will need to engage with their savings and pay in substantially more than the auto-enrolment minimum from a very early age if they wish to achieve the same kinds of income offered under previous arrangements.
There’s also the effect of house prices to consider, and while many will have benefited from their growth, a large number of people will face the prospect of paying their mortgage into their 60s.
Here today, gone tomorrow
We’d urge the chancellor to look forwards and avoid basing policy on the financial position of pensioners today. With Brexit the main attraction, many of us, pensioners included, would be happy if pensions largely took a back seat in his speech tomorrow.
There are six ways that Hammond could support saving and investing.
First, he should base future pensions policy on a forward looking assessment of likely pensioner wealth, not on the wealth position of today’s pensioners.
Second, Hammond should commit not to change the approach to pensions tax relief ahead of the next general election, to avoid destabilising pensions.
He also should support the continued successful roll-out of automatic enrolment, to the current timetable, which will see contributions rise to 8 per cent of income by 2019.
Fourth, Hammond should avoid state and private pension policy changes which lead to a greater burden on future generations.
He should avoid confusing savers by introducing any further government designed savings vehicles, and ought to reverse the recent cut in the pension lifetime allowance to avoid anti-saving messages.
Sixth, the chancellor should continue to set policies and drive action to allow new and existing savers to benefit from the digital age.