Budget 2017: Experts make eight predictions as to what is in store for pensions and savings

 
Oliver Gill
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Future Of The Penny In Doubt
Look after the pennies and the pounds will look after themselves: Experts give their predictions in advance of tomorrow's budget statement (Source: Getty)

In his Autumn statement chancellor Philip Hammond resisted the temptation of making sweeping changes to pensions and savings.

However, according to AJ Bell's senior analyst Tom Selby: “Tinkering with pension contribution allowances is a perennial favourite of chancellors on Budget day and Philip Hammond showed he was no exception in the Autumn Statement."

Here's eight topics experts are predicting could be covered tomorrow.

1 – Pension tax relief

“Large-scale reform of the UK’s pension tax relief framework was reportedly shelved ahead of the last Budget as former chancellor George Osborne attempted to avoid rocking the EU Referendum boat," said Selby.

It is not inconceivable Philip Hammond will return to these reforms in the budget – particularly as pension tax relief is expected to cost the Exchequer £38.2bn in 2015-16. With the NHS in crisis, the chancellor may be tempted to raid pensions in order to beef up healthcare.

“However, the Treasury may be nervous about pursuing a radical, resource intensive and potentially unpopular reform, especially with ministers’ minds firmly focused on Brexit negotiations."

Read more: Would more pension tax relief tinkering just damage the incentive to save?

Jon Greer, Old Mutual's pension expert, is less certain. He said: "It seems highly improbable that a new pension tax relief system would be unveiled at the Budget, but it is not inconceivable that the prospect of future change could be signposted."

2 – Taper relief

A more probable change is taper relief, according to Greer: "One thing he could do to simplify the complex pensions landscape is to scrap the annual allowance taper. Philip Hammond is in a position to backtrack on the annual allowance tax taper, since it could easily be chalked-up to an error of judgement by his predecessor, George Osborne.

It is a really complicated measure that makes it extremely difficult for people to plan their savings. It could lead to the unintended consequence of employers limiting pension contributions for staff to avoid any accidental breaches of the annual allowance.

Read more: There's a £47,000 shortfall in employer pension contributions for women

3 – Triple lock

Most define the triple lock as the increase of the state pension payments annually by either inflation, average earnings growth or 2.5 per cent, whichever is highest... others simply call it a convenient political football.

Either way, it's a blinkin' expensive promise, costing the government "billions" according to Selby.

Read more: MPs: Keeping the pensions triple lock means no one will retire until age 70

"The future of the state pension triple-lock looks set to be a key political battleground as the Budget approaches. The influential work and pensions committee has gone on the attack this week, with MPs warning retaining the triple-lock will force up the state pension age," he said.

"Meanwhile, Labour has already committed to retaining the triple-lock beyond 2020. While its future may appear bleak, it’s worth remembering the triple-lock was introduced to help recover some of the value lost after Margaret Thatcher controversially scrapped the earnings link in 1980.

However, it was never meant to be a permanent measure and costs the Exchequer billions. The government will be wary about hitting pensioners ahead of the 2020 election – and breaking its manifesto promise in the process – but it would be no surprise to see the chancellor signal the end of the triple-lock in his Budget speech.

4 – State pension age

John Cridland is mid-way through a review of the state pension age. Suffice to say, as the nation ages, the age at which we will be able to retire is likely to increase.

Read more: The state pension shake-up: what the experts say

“The Cridland review into the state pension age is due to report this year, so the chancellor may want to ‘roll the pitch’ by signalling the government’s preferred direction of travel for future increases," said Selby.

Given the more flexible approach people are taking to retirement today, the government could look at allowing people to take their state pension earlier, with the amount they receive adjusted so it is cost neutral for the Exchequer.

5 – Isa allowance

Selby said we shouldn't expect any further increases in Isa allowances:

Hammond has already said he doesn’t have a pot of money under his desk so it is unlikely we will see any major giveaways for savers in the Budget.

Read more: Smart investments: Look beyond pensions and Isas to VCTs and EIS

"The main Isa allowance is already due to rise significantly to £20,000 in April and we would like to see the chancellor maintain the government’s commitment to increasing the Isa allowance each year in line with inflation."

6 – Investment bond

Premium bond payouts may be falling but the entity that manages the process, National Savings & Investments, may be given licence to amend the returns it can pay to investors on some of its more conventional saving products, according to the man from the Pru, head of technical Les Cameron.

Read more: Here's what we know so far about the new government-backed investment bond

"In the last Autumn Statement the chancellor announced a new Investment Guaranteed Growth Bond, launched through National Savings & Investments with what was termed a 'market-leading' interest rate of 2.2 per cent before tax forecast.

We expect the actual rate to be announced and the rate at which it is set will be of particular interest as it is a good benchmark on what the return on a 'no risk investment' might look like.

7 – Drawdowns

Prudential's Cameron has a number of wishes from tomorrow's speech and one is relation to giving people more flexibility to draw down lump sums from their pensions.

Read more: Eight annuity myths we're falling for

“One simple reform would be to allow members of pensions schemes and their beneficiaries to be able to use the open market option to access drawdown.

If an individual’s scheme does not allow drawdown, they can generally only buy an annuity or take a lump sum. On their death they can’t pass their pension onto beneficiaries as a lump sum or annuity would be the only option. Allowing an open market option to drawdown would really open up pension freedoms for all.

8 – Money purchase annual allowance (MPAA)

Not the easiest one to define in lay terms, but an important point that experts have stressed needs a rethink.

The government's Pensions Advisory Service describes it as follows: "The MPAA is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000."

Read more: Pension clampdown threatens flexible working

Current plans are in train to drop the cap markedly...

“The proposed cut to the MPAA flies in the face of the pension freedoms. People are being encouraged to use their savings flexibly and yet when they do so they are punished with a drop in their annual allowance from £40,000 to £4,000," said Selby.

Greer said: “Abandoning the proposed reduction in the (MPAA) to £4,000 would also be a good step. The rules are designed to prevent pension cash being recycled to create a tax arbitrage.

"But the proposed reduction in the MPPA to £4,000 risks inadvertently penalising individuals that want to continue funding pension contributions in their late 50s and beyond after they have flexibly accessed some money purchase income."

Selby added: “It is not just the super-rich who will be affected – large chunks of middle Britain, many of whom might need to catch up for years when they have failed to save, will also be caught.

“We’d like to see the chancellor take a step back from this proposal and look at other measures that would be economically more beneficial to the Treasury and fairer to consumers."

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