Chancellor of the Exchequer George Osborne announced his last parliamentary budget yesterday, promising to get Britain “walking tall” with a rise in the tax free allowance from £10,800 to £11,000 next year, £1.3 billion pledged support for the oil and gas industry, and the minimum wage projected to rise to £8 per hour by the end of the decade.
The pensions lifetime allowance will be cut from £1.25 million to £1 million because Osborne feels it is currently unsustainable.
Graham Vidler, Director of External Affairs, National Association of Pension Funds, said:
“The Chancellor’s commitment to index-link the Lifetime Allowance from 2018 is welcome. But the question remains, what will the LTA be in three years’ time?
“Let’s hope past performance is not an indication of future cuts. The LTA has been cut by £0.5m in the last three Budgets which if repeated would leave an LTA of £0.5m. This would buy an income of around £10,000 per year.”
Another major change to the pension system is the opportunity to re-sell annuities from 2016.
Graham Vidler is concerned about the protection of savers when this is implemented. He said:
“This clearly fits with this Government’s agenda for pensions, but it’s unclear how savers will be protected. We welcome the full consultation as it will be essential to ensuring a fair and balanced market.
“It’s vital this does not distract us from or undermine the Freedom & Choice pension reforms due to begin in 19 working days. The Government must make sure this doesn’t divert focus or resource from Pension Wise, damage the broader annuity market or slow down the development of a much-needed market in retirement solutions for those looking to make use of Freedom and Choice from next month.”
Kevin Legrand, Head of Pensions Policy, Buck Consultants at Xerox, is equally cautious. He said:
“Employers and the pensions industry need to work together to help people to make sensible decisions. Care is needed to avoid these new flexibilities being a short term gain at the expense of a long term loss.
“The extension of freedoms needs an effective life support system. The common aim must be to assist vulnerable pensioners and employees in making sensible decisions throughout their working lives and beyond.
“A challenge will be to ensure that there is a robust guidance and advice regime, of similar weight to the one protecting transfers above £30K from DB to DC schemes, to protect pensioners.
“There is also a key role for the pensions industry and employers, working together to help, in particular, today’s pensioners and older employees. There are many potential media, from simplified products and clearer rules, to workplace support, developing and deploying interactive member-focused tools such as retirement modellers incorporating all of an individual’s assets.”
Lydia Fearn, Head of DC Pension & Investment Consulting at Barclays Corporate & Employer Solutions, welcomes this development but believes that greater financial education is needed to keep up with the changes. She said:
“The Chancellor’s announcement is a step towards bringing choice to all pensioners, allowing greater flexibility for those over 55 in how they use their pension pot. However, our view is that individual’s often show a behavioural bias towards accessing cash today, over drawing a comparative income over an indefinite period, and so there is a risk that some may make poor decisions when preparing for their financial futures, even though they may already be retired.
“Financial education is therefore key to the success of today’s proposals. Our research shows a clear need for DC scheme members for more financial assistance, with three quarters of people needing help just to understand what their likely income will be in retirement. Support will be important in ensuring people make the right choices in light of their new financial freedoms.”
Iain Chadwick, consultancy director at workplace pensions and employee benefits specialist Johnson Fleming, also feels that communication and education will be necessary:
“As options broaden, more opportunities for bad choices arise. The Government must, therefore, ensure that these further amendments – announced at what is already a time of unprecedented change to the pensions market – are communicated clearly and that the guidance guarantee is able to support the 6 million annuity holders who may now have complex questions to answer.
“With auto-enrolment bringing everyone into workplace pensions, it is now more important than ever for the Government to ensure companies are better educated so that they can support employees – faced with an ever-growing list of retirement options – to make that critical personal pensions decision.
“Between April 2015 and January 2017, approximately 598,000 UK businesses will stage, representing the largest group of companies to auto-enrol to date and this represents a great opportunity to use the workplace as the route to deliver better understanding to ensure people make the best use of the freedoms they now have.”
Steve Groves, Chief Executive Officer of annuity provider, Partnership, is understandably positive about the plans for pensioners to be able to sell their annuities but admits that precautions need to be in place to create a safe and fair market. He said:
“Interestingly, this year’s Budget contains good news for not only consumers but also for annuity providers. The creation of a well-regulated carefully-designed second hand annuity market could mean that peoples annuities are now more flexible, still guaranteeing an income for life but also able to provide some extra cash when it is needed. It will provide those five million older people who have already taken an annuity with a greater degree of flexibility.
“Admittedly, the devil is in the detail and its now falls to the Government and industry to create a safe market which provides real value to consumers. Extending the freedoms to past-annuitants and providing future generations with even more flexibility is simply not good enough unless it has a genuinely positive impact on their lives and this needs to be at the heart of the consultation.”
For comments on employment, wages and tax breaks, continue to part 2.