Pensions - Articles - Policy changes to 2-3m pensioners means inadequate income


Hymans Robertson has analysed the long-term impact of the Chancellor’s recent introduction of the Lifetime ISA (LISA), as well as spending on state pensions, auto-enrolment and likely policy initiatives stemming from these. The results present a long-term picture of less spending on pensions and more retirees living on inadequate incomes.

 Key points:
     
  1.   By 2060 we’re likely to see 2.1% per annum less of GDP spent on pensions (due to reduced spending on State pensions, likely reductions to spend on pensions tax relief and less scope to increase spending as 0.7% less will be received in tax receipts)
  2.  
  3.   Auto-enrolment won’t fill this gap. Extra pension saving from this is expected to be around 0.8% of GDP p.a.
  4.  
  5.   We wouldn’t be surprised to see DWP analysis showing 2-3 million more retired workers living on inadequate incomes on top of the 12.2m already forecast by the Government
  6.  
  7.   This is all in the context of half of private sector workers not saving enough currently
  8.  
  9.   LISAs will not solve the problem of chronic under-saving
  10.  
  11.   But they are attractive to the Government as they’ll bring forward tax receipts, meaning less tax paid tomorrow and less built up in pots over the long-term
  12.  
  13.   If 5% of basic rate taxpayers made the switch to LISAs and gave up employer 1:1 matching pensions, this would cause a reduction of £1.5bn in annual pension savings
  14.  
  15.   HMT is looking for a large fiscal consolidation the year before the next election – it’s hard to see how pension tax relief won’t have a role to play in that
  16.  
  17.   Running LISAs in parallel with the current regime will smooth the way for more radical change in the future when the political environment is less risky
  18.  
  19.   If new savings into DC via EET were stopped, and savings into DB further curtailed through more reductions to annual and lifetime allowances, this would see around £25bn p.a. of increased income to the Exchequer by 2020
  20.  
  21.   Or if new savings into both DC and DB were stopped this would have a net annual improvement of £35bn to Government finances

 Commenting, Jon Hatchett, Partner at Hymans Robertson, said: “In our view the direction of travel for pensions policy has been set by the introduction of the Lifetime ISA (LISA). These could be the ‘Trojan Horse’ to end the pensions system as we know it. 

 “Given the need for tax revenue, and without Brexit looming large in the political landscape in a couple of years’ time, wholesale change to the pension regime is a reasonable expectation.
  
 “By 2018 there’s likely to be a much more favourable backdrop for radical change. The Treasury will be able to point to successful implementation of LISA products in the marketplace and people saving into this new regime. This will be just in time for a large fiscal consolidation the Treasury has planned for the year before the next general election. LISAs could be opened up to the whole working population without the angst that would have clearly arisen had the switchover occurred without running both systems in parallel.
  
 “A credible scenario is the Treasury may then stop new savings into DC EET vehicles altogether, while significantly curtailing the cost to the exchequer of DB EET vehicles by slashing the lifetime and annual allowances further. Not only would this reduce direct tax relief, particularly for higher and additional rate taxpayers, but also it would dramatically reduce the cost of relief on employer NI contributions (worth some £14bn each year alone).
  
 “In this scenario we could see increased income to the exchequer in 2020 of around £25bn per annum, assuming pension savings stay at the same level.
  
 “Another would be to stop new savings into both DC and DB. This would have a net annual improvement to Government finances of around £35bn per annum.”
 Discussing the long-term impact on savings, he added:
  
 “The overall reduction in spend on State pensions, tax relief and the effect of lost tax receipts in the future will not be offset by extra pension saving from automatic enrolment (c. £13bn or 0.8% a year). By 2060 we’re likely to see 2.1% per annum less of GDP spent on pensions (due to reduced spending on State pensions, likely reductions to the amount spent on pensions tax relief) and less scope to increase spending as 0.7% less will be received in tax receipts. We wouldn’t be surprised to see a DWP analysis showing an additional 2-3 million more retired workers with inadequate pension savings over and above the 12.2m already predicted by the Government.
  
 “This is an unsustainable position for any Government. Voting prevalence among those approaching or in retirement tends to be high. In that context we’re likely to see political pressure to increase expensive pension spending to make-up the gap. This is hugely inefficient as £1 of government spending on state pensions provides £1 of old age income to the populous; whereas £1 of spending tax reliefs which incentivise pension savings generates at least £5 of old age income for lower earners.
  
 “This is a major problem with Government saving policy. The Treasury seem to be putting short-term revenue generation ahead of long term economic consequences of under saving. We are undermining our children’s and grandchildren’s generations’ financial security. This is risky and is out of line with international comparators.”
  

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