Andrew Megson, Executive Chairman, My Pension Expert, discusses what the pension industry hopes to see from the Budget 2021 and explains what the touted changes could mean for UK savers
It has now been almost a year since Chancellor Rishi Sunak delivered his first budget, which due to the onset of COVID-19, was unlike any other Conservative Budget in peacetime.
The Government offered unprecedented financial support – such as the furlough scheme and bounce bank loans – to help businesses and households stay afloat throughout the pandemic. As it stands Government borrowing has totalled £270.6 billion between April 2020 and February 2021 – £222 billion more than a year ago.
Now that the UK Government has revealed its UK roadmap to navigate its way out of the pandemic, the question of paying for such support has inevitably arisen. And there has been plenty of talk that pensioners may bear the brunt, with rumours milling that the Chancellor will make cuts to the triple lock, or pension tax relief order to foot the bill.
Naturally, this will be disconcerting to savers; if the Chancellor is to make any drastic changes to pension policy without forewarning, this could upend the retirement plans of multiple generations.
With this in mind, here some key points that I hope the Chancellor will consider ahead of the Budget on 3rd March.
Conserving the triple lock
One particular area of concern within the pension sector is the fate of the state triple lock policy. In 2010, this policy was announced by the Conservative-Liberal Democrat Government to ensure the state pension does not lose value against inflation; as such, it rises by 2.5% each year.
Currently, rumours are milling as a right-of-centre thinktank with close links to Downing Street has called for the triple lock to be scrapped. Such calls are not entirely unwarranted, as evidence suggests that the Government could save up to £14 billion by 2023 if they are to go ahead with plans.
No doubt, the policy is a costly one, but it is a vital policy that keeps society’s most vulnerable out of pension poverty. Indeed, as recent research from the Pension Policy Institute has revealed that for the poorest pensioners, three in every four pounds of their income comes from the state pension.
In short, making drastic changes or cuts to the triple lock, without any viable alternative in place, will only affect those who need it most – especially as the rate of inflation increases. Thus, I hope that the Chancellor will think twice before enacting any changes to this policy.
Safeguarding pension tax relief and annual contribution limits
Other vital pension policies under fire are pension tax reliefs and annual contribution limits, which at present, are amongst the most effective incentives enabling individuals to save for a secure financial future.
Pension tax relief policy usually works as follows: when a saver pays into their pension, any money that would ordinarily have gone to the Government in the form of income tax is instead, saved into the pension pot. At present, this relief is paid at the highest rate of income tax a saver pays; this means that basic rate taxpayers will receive 20% tax relief, whilst higher and additional rate taxpayers receive 40% and 45% respectively.
Annual contribution limits were introduced in 2006 as part of the Government’s move to simplify pensions. In reality, this is another mechanism to limit the amount of tax relief on an individual’s pensions contributions. The current contribution limit is £40,000 (less for high earners). A simple and less obvious way of reducing the state tax burden is to reduce the annual contribution allowance.
Given that many individuals will have built the entirety of their retirement strategy on the premise that they will receive the allowance, scrapping the policy would make a stark difference to the retirement savings of individuals spanning all generations.
What’s more, lowering the allowance might also deter younger savers from putting enough money away to save for a financially viable retirement. Frankly, this is simply kicking the savings problem down the road to save money today. As such, I urge Mr Sunak to hold back on making any severe alterations to the policy – doing so could cause more harm than good to future generation of retirees.
Increasing knowledge
One of the biggest issues within the retirement finance sector is the topic of pension fraud. Pension scammers have been present long before the onset of COVID-19. However, the pandemic has enabled more fraudsters to take advantage of potential victims.
The pandemic has inflicted a great deal of damage to the finances of households all over the country. Consequently, individuals will be finding themselves more stressed – and even panicked – than usual. And unfortunately, this can make them susceptible to pension scammers. In fact, recent research from My Pension Expert has found that over one in ten (11%) of UK adults were targeted by pension scammers in the first half of 2020 alone. Clearly, the Government ought to address this issue.
Whether through a series of targeted initiatives or by releasing educational tools with a view to increasing pension saving knowledge, this is a measure I hope that the Chancellor will consider taking when the Budget rolls around on the 3rd March. In any case, the Government should be doing what it can to ensure that savers are protected and have access to regulated independent financial advice when they require it.
The Government has been both thorough and generous in its efforts to support individuals and businesses in the UK, as we have weathered the storm of COVID-19 together. Of course, the Chancellor must take the necessary steps to repay this debt – but I hope that he will do so with caution and care directed towards pension policy.
Throughout the pandemic, the prospect of saving for a secure financial future has never been more important, and I can only hope that when Chancellor announces his budget, that the Government will do all it can to ensure that this remains a reality.
