Pensions - Articles - Budget 2014: Reactions to pension announcements

 Commenting on the surprising pension outcomes of today’s Budget speech, which the Chancellor described as the most far reaching reform to the taxation of pensions since the regime was introduced in 1921, Malcolm McLean Barnett Waddingham says:

 “Rather than further tinkering with the tax-relief allowances, the Chancellor has clearly strived to think radically about the need for greater flexibility and consumer choice in redrawing the pension rules.

 “These changes could have far reaching effects, particularly in relation to annuity purchase and a big increase in the use of income drawdown. The rise in the trivial commutation limits from £18,000 to £30,000 overall and for three ‘stranded pots’ instead of two, increased from £2,000 to £10,000 is much higher than anyone anticipated ahead of the Budget.

 “The full implications of the changes will no doubt become clearer over the next few day, but initial reaction has to be extremely favourable.”

 Commenting on the proposed pensions and savings changes in today’s Budget, Roger Mattingly President of the Society of Pension Consultants said:

 “This is a breath of fresh air for pensioners and those approaching retirement. The Chancellor has woken up and smelt the coffee, delivering one of the most refreshing Budgets for pensioners in recent times. In one fell stroke he has broken down the barriers to the customisation of individual benefits for those living in increasingly modern circumstances.
 
 “With these new freedoms, however, the need for advice will be greater than ever before. The key to the successful roll out of these plans will be the continued development of a professional, affordable advisory system where advisers truly put the interests of their clients at the heart of all their decision making. The scope to advise in a superficial and formulaic way no longer has a place in society.”

 Tony Clare, pensions advisory partner at Deloitte, said: 
 
 “Reforming income drawdown rules is long overdue. It will make pensions more flexible and attractive. Income drawdown accounts for about 15% of the UK’s £11bn annuity market and these changes will make it much more widespread. About 400,000 people buy an annuity every year and many could increase their retirement income by about 15% a year using income drawdown. Giving people free advice at the point they make retirement decisions is an excellent idea.”

 This April sees the income tax personal allowance rise from £9,440 per annum to £10,000 per annum following the 2013 Autumn Statement. Today’s Budget has confirmed a further increase, from £10,000 to £10,500, due to come into force in 2015. 

 Robin Hames, head of marketing, commented: “Auto-enrolment has been a success with relatively low opt out rates. However, auto-enrolment figures published by The Pensions Regulator found that as of the end of February 2014, while over 3.2 million people have been auto-enrolled, a further 3.8 million employees were not eligible to be auto-enrolled.[i] This is because they did not meet the criteria; often because they did not earn enough to reach the earnings trigger for auto-enrolment. ii

 “Currently the Government’s practice is to set this trigger at the same level as the personal allowance - the amount that individuals can earn before paying tax. So, from this April anyone earning less that £10,000 will no longer be eligible for auto-enrolment and, assuming the Government’s practice of linking auto-enrolment to the tax threshold continues, from next year no one earning less that £10,500 will qualify. This means that many thousands more employees who would previously would have been automatically entered into a workplace pension, will not be.

 “So, while many will welcome a raise to the personal allowance, it’s important to consider whether it’s prudent to continue using it as the earnings trigger for auto-enrolment. After all, auto-enrolment was introduced because people weren’t saving for retirement, so increasing thresholds may undermine a, so far, successful initiative.”

 “Saga welcomes today’s Budget that encourages saving for the future and ensuring those that do so are appropriately rewarded.” Said Saga’s director of communications Paul Green.

 “There are a number of announcements in today’s budget that will be music to the ears of the over 50s. Many older savers want to be able to save the whole ISA allowance in cash, and the reduced tax on savings income will be a huge boost to those who have saved and done the right thing.

 Trusting people with their money must be the right approach, but with greater longevity the biggest challenge is to make people’s savings last a lifetime. Those saving for retirement and the financial services industry need to step up to the challenge to enable savers achieve their retirement dreams.”  

 Richard Jones, Annuities Director at Scottish Widows said:

 "Today's announcement on annuities will provide welcome flexibility for customers at the point of retirement, particularly those retiring with smaller nest eggs than they had hoped for. It is, however, vital that this is not viewed as ‘free money’ as their pot will still be subject to certain taxes. People will still need to ensure they still have a regular income to fund their ongoing retirement.

 "Our research shows less than half of people are fully aware of all their options at retirement. This change reinforces the importance of seeking professional advice, where possible, so people know and understand the options available."

 Andy James, head of retirement planning, Towry considers options for retirees following the Chancellor’s Budget:

 “Today’s Budget statement provided fundamental changes as to the structure of retirement funding in the UK. ‘Flexibility’ has been the buzzword, with pensioners able to take their entire fund as cash, and the maximum income a person in income drawdown can take is rising to 150 per cent. Both announcements should ensure people will not feel forced to take the first annuity they are offered upon retirement.

 “A recent Towry survey has shown that just 22% of retired adults took an annuity within their first year of retirement?. At current annuity rates, a £1.25m pension fund (the new maximum lifetime allowance limit) would only initially provide an individual with around £40,000 per year in terms of a rising retirement income?. The fact that so few retired adults are taking an instant annuity suggests that retirees are already thinking more flexibly about their retirement fund, as well as the fact that poor annuity rates are putting many off.

 “Pension contributions are becoming increasingly important, not least as making additional contributions could help with higher-rate tax relief. According to the Institute for Fiscal Studies, 1.1 million extra higher-rate taxpayers have been created since the coalition government took office four years ago¹.

 “The lifetime allowance, which many commentators had feared may face further cuts to £1m, has been afforded a stay of execution for now. Nonetheless, people whose pensions are valued in excess of the new £1.25m limit are swiftly running out of time to apply for fixed protection, which will maintain the current £1.5m lifetime allowance. The new limit comes into effect on April 6th.

 “With the impending lifetime allowance reduction, many people will need to seek alternative ways of saving for their retirement as the reduced allowance may not, in itself, be enough. ISAs are an obvious first port of call if your pension is hitting the lifetime allowance limit, and the Government has dramatically aided this valuable tax benefit today by announcing the merger of cash and stocks & shares ISAs to create a £15,000 ‘Super ISA’.” 

 Commenting on the Budget 2014 ‘Freedom and choice in pensions’, Ian Hammond, Managing Director, Rowanmoor Group plc said:

 “The industry has been calling for pensioners‘ income flexibility and choice at retirement to be widened, however the scale of the announcements in today’s Budget could not have been anticipated.

 “It is unprecedented for changes of this scale to be implemented, particularly in such short timescales, without consultation.

 “All pension scheme providers will have to make immediate changes to their systems to account for the immediate changes to the pension regime effective from 27 March 2014.

 “The potential impact of the reduction in the minimum income requirement to £12,000 per annum is likely to result in many more people taking their whole pension fund early, with the consequence of an increased reliance on state benefits.

 “Whilst these reforms appear be the bedrock of a new, more flexible pension system in the UK it will take some time for the industry to fully digest their impact.”

 Commenting on Budget 2014 ‘Combatting Pension Liberation - Changes to Finance Act 2004’ Ian Hammond, Managing Director, Rowanmoor Group plc said:

 “We are in the process of digesting the implications of this Guidance Note. As the UK’s largest independent small self-administered scheme (SSAS) provider we also support the requirement for a fit and proper administrator to be appointed as we have been calling for this for some time.”

 Commenting on today’s Budget statement, Matthew Phillips, Managing Director of BROADSTONE commented:

 “This is a very significant budget with respect to changes to ISAs and Defined Contribution Pensions.

 “We welcome the fact that ISA has finally been made simple and more relevant. Rather than investors having to worry about whether you go to a cash ISA or investment in stocks and shares, potentially becoming confused about the different levels, this has now been removed so that you can either hold cash, or investment, in the same account. At BROADSTONE we believe that this change will make the system far simpler and straightforward, potentially encouraging people to save and not, most importantly, be put off by the perceived complexity.

 “In addition, the increase to an allowance of £15,000 means that a couple can now shelter up to £30,000 of savings and investments each and not pay tax. We welcome this and again have the added value of making the savings system in the UK more straight forward.

 “Additionally, we believe the changes to Defined Contribution Pensions are significant. Through auto-enrolment, most people will be placed into a DC pension scheme. However, the chancellor has today announced that these will become more flexible. Individuals will not have to purchase an annuity and you will consequently be able to draw out income when you want to the amount you want. Accordingly, short and medium term savings could be carried out through ISAs and long term retirement saving into what is arguably looking like a ‘big ISA with tax breaks,’ your defined contribution scheme. This is a much simpler set of affairs for everyone going forward.

 “Over the longer term, we at BROADSTONE hope that this simplification will lead to greater pension take up, now that some of the perceived inflexibility has been done away with. And while I welcome the simplicity, people will still need to have comprehensive financial planning in place because this additional flexibility means that the need to take advice is greater.”

 Chris Noon, partner, Hymans Robertson comments on the Chancellors announcements on pension reform in today’s budget:

 “The message is clear - greater trust, flexibility and responsibility for people retiring on DC pensions. The uncomfortable gap between pensions and ISAS has been bridged - pensions are now like ISAs in reverse.

 “Annuities are out and flexibility in retirement is in vogue. Spending in retirement has never matched a steady income approach – it is a game of three halves: spend early on life, spend late on ill-health and spend little in the lull in-between. Today’s changes offer the flexibility to spend pension pots in line with this V-shaped curve of life in retirement."

 On pension winners and losers

 “Middle and high earners will be celebrating tonight – they have always craved flexibility and now they have it. Lower earners may celebrate at first too, but there should be an air of caution here. The gleaming temptation to take a bigger lump sum at-retirement could result in some lower earners spending their full amount within a few years of retiring. Free government-backed advice at-retirement is a great thing, but for many savers they are now facing a retirement with a need for regular advice right post-65."

 Please note, this release will be constantly updated with comments on the Budget.