Spring Budget 2021: Pensions industry concerned 'wrong signal' being sent to savers

The pensions industry has expressed concern that measures announced in the Spring Budget send “the wrong signal” to retirement savers and will make it “painfully difficult” to plan for later life.

Chancellor Rishi Sunak’s Budget included announcements that the pensions lifetime allowance (LTA) will be frozen at £1,073,100 until April 2026, as well as confirming plans to remove "barriers" in pension regulation that may have discouraged defined contribution (DC) pension schemes from investing in high-growth companies.

The former change elicited more of a reaction than the latter, with Royal London head of intermediary development & technical, Clare Moffat, stating that measures which raised tax income were “understandable”, but arguing that it was becoming “painfully difficult” for people to construct cohesive retirement plans amid constant rule changes.

She continued: “Building a pension pot for retirement is a long-term objective and needs some stability in the tax rules to allow people to plan effectively.

“The LTA usually rises in line with the consumer price index every year and a five-year freeze means the LTA will be substantially lower by 2025/26 that it otherwise might have been. We will see more people potentially falling foul of a tax charge.”

Baker McKenzie partner, Jonathan Sharp, was more accepting of the change, stating that it was a “discrete way for HMRC to recover some extra taxes”, which would not “raise too many eyebrows”.

He added: “Given all the disquiet last year over the annual allowance and its impact on doctors - which resulted in those thresholds being raised - the Treasury will have decided that any reductions to that would have been off limits.

“An actual reduction in the lifetime allowance would have brought a significant number of people within its ambit, so by keeping it frozen the Treasury are balancing recovering some additional money while still keeping it out of reach of most people.”

On the freezing of the LTA, Canada Life technical director, Andrew Tully, commented: “This measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance.

“We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how DC savers and those with defined benefit income are treated for lifetime allowance purposes.”

Pensions Management Institute director of policy, Tim Middleton, said the freezing of the LTA was “disappointing”, noting that when it was introduced “the industry was relieved to see a simplicity from the harmonisation of different pre-existing tax regimes.

He continued: “Since that time, however, we have experienced a number of downward adjustments which collectively have resulted in administrative complications and confusion for scheme members. We are concerned that today’s measure will serve as a further disincentive for workplace pension saving which can only have a negative impact for society as a whole.”

Holding the LTA steady was not the only topic of conversation in the industry, with some commentators picking apart the decision to remove barriers for DC schemes looking to invest in illiquid assets.

Barnett Waddingham partner, Sonia Kataora, said: “Removing some of the impediments to investing in illiquid assets in DC schemes is a good thing for DC members, as it will allow access to a wider source of returns, often uncorrelated to traditional return sources.

“DWP has recently consulted on changes to the charge cap requirements in order to ease difficulties with performance fees, which are commonly used by illiquid funds and which is one obstacle. Today’s announcement shows intent to alleviate any practical concerns around such issues.

“Some DC schemes do already successfully invest in less liquid assets – for example, by pooling alongside more liquid investments and planning ahead for potential gating issues. And, of course, property has been used fairly commonly as an investment by DC schemes for many years.”

Audley Group COO, Nick Edwards, was similarly positive about the change, stating: “Pension funds are to be given more flexibility to unlock money to invest in innovative ventures. We don’t have all the details on what exactly this means yet and will wait for the draft regulation.

“But, freeing up institutional investors to move away from traditional assets, into alternatives could be bring about major change. And, given the pressure on the pension system, it’s a welcome move to encourage pension funds to diversify investments and achieve higher returns."

Finally, there was the news that Rishi Sunak had made the decision to stick with the ‘triple lock’ on state pensions, which had been a Conservative Party Manifesto commitment at the last General Election in 2019.

This is despite concerns that this policy, which sees the state pension rise by whichever is highest out of earnings growth, inflation or 2.5 per cent, could see the cost of the state pension rocket if the country experiences a strong pandemic recovery.

Aegon pensions director, Steven Cameron, said: “Every 1 per cent increase to the state pension adds around £1bn for every future year to the government’s unfunded pension liabilities, which then creates a ‘pay as you go’ burden on earners below state pension age.  

“Sticking to manifesto commitments would in most circumstances be the honourable thing to do and breaking any is clearly not something which should be done lightly. But sticking with the state pension triple lock as well as the tax triple lock leaves the Chancellor grappling with more locks than Houdini.

“The extreme circumstances we face post pandemic mean commitments made before just wouldn’t be made now and at some point in the near future, the government may need to provide the nation with further honest facts and allow the chancellor to ‘break free’.”

AJ Bell senior analyst, Tom Selby, looked at the issue as one of political survival for the Conservative government, stating: “Given the parlous state of the nation’s finances, many expected the Chancellor to wield the axe on the state pension triple-lock. However, the Chancellor has, at least for the time being, left the policy alone, perhaps fearful of the impact targeting the state pension could have on people who leant the Conservatives their vote at the last general election.

“Regardless of arguments around fairness and cost, if the government had reneged on its triple-lock manifesto commitment it would have risked being heavily punished at the ballot box in four years’ time.”

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