By Ian Linden, James Hay Partnership
As a country we are comfortable with the norm and are generally suspicious of change. When change is mooted there is often a ‘knee jerk’ reaction, with people accentuating the negatives rather than the positives. So what has this got to do with the Budget?
Prior to the Budget, negative rumours dominated, with the often-cited opinion that there was going to be another tranche of legislative changes affecting pensions. These rumours included a further reduction in the annual allowance and some form of restriction on the tax-free nature of the pension commencement lump sum. In the year when we will see the introduction of auto enrolment, it seemed incomprehensible that the Chancellor would introduce wholesale changes to pension legislation. Concurrently, given the state of the country’s finances and contingent liabilities resulting from increasing longevity and unfunded pension liabilities (witness the recent decision by the government to take over the Royal Mail pension scheme, including a deficit of £9.5bn, and ‘run’ it as an unfunded public pension scheme!), the last thing the government can afford to do is dissuade people from funding for their retirement.
From an observational perspective, as a country and as individuals, we now seem comfortable with debt and have become addicted to a certain standard of living, with little desire to change. To fund this lifestyle we are prepared to take on more debt. Deferring the inevitable is not a risk free strategy, for at some point in the future it will be pay-back time, unless of course we wish to live in penury in our old age. As individuals we need to overcome the desire for immediate gratification and expand our time horizon to consider how we are going to live in retirement. This is where I believe personal pensions play an important part. They are still one of the most tax-efficient ways to save and if the fiscal austerity required to resolve the UK debt is ratcheted up to the necessary level, there may come a time where the universality of the state pension is no longer guaranteed.
It could be construed that we are already some way down this path, as the Budget contained the government’s commitment to increase the state retirement age (SRA) to reflect increases in longevity. It has been suggested that for someone currently aged 33, their SRA could be 73. While it could be argued that this is purely a reflection of the increase in longevity, equally it can be argued that the quality of life of someone receiving their state pension for the first time at 73, if they reach that age, may be significantly different to that of someone retiring at 65. For those who are likely to be most reliant on the state pension, life expectancy can be very close to this suggested SRA; in Scotland the average life expectancy for males born between 1999 and 2001 is forecast to be 73.4 years, with a low of 63.9 years in some parts of Glasgow.
From 2013 we will be in an environment where what was once a universal benefit will no longer exist, namely that of Child Benefit (accepting of course that you had a child). An unintended consequence of the changes being made to Child Benefit may be a boost to pension funding for some individuals. Similar to the loss of the personal allowance for those individuals with income in excess of £100,000, for those individuals with income in excess of £50,000 there will be an income tax charge to reflect the withdrawal of Child Benefit. For every £100 over the £50,000 threshold of “adjusted net income” they will lose one percent of their Child Benefit entitlement. For a person with income of £60,000, child benefit will effectively be lost, and thus for a family with two children this equates to a marginal rate of tax of 57.5% on this band of income. As with the situation for those losing their personal allowance, pension contributions reduce “adjusted net income”, so for someone earning between £50,000 & £60,000 not only will they get tax relief on their contributions but it could also preserve all or part of their child benefit.
If it is accepted that the concept of universality has ended through the effective removal of Child Benefit for certain people, allied with the envisaged increase in the SRA, then perhaps the government is “thinking the unthinkable” in its attempts to reduce the fiscal deficit, by giving consideration to the re-introduction of a fully means tested state pension, as was the case when it was first introduced. Just as with those with income in excess of £100,000 who lose their personal allowance, and the loss of Child Benefit from 2013 for those with income in excess of £50,000, this type of mechanism might in the future facilitate an arrangement whereby someone with an income in retirement over a pre-defined level, effectively loses the right to the state pension. In such an environment, the need for advice on pension planning will be even greater, as individuals may end up funding for private provision that would otherwise be available through the state.
Ian Linden has been involved in financial services for over twenty years, spending the early years as a Financial Adviser, before moving into management roles with national adviser firms. As well as his MBA, Ian holds the Diploma in Financial Planning from the Chartered Insurance Institute and the Retirement Provision Certificate from the Pension Management Institute.
His current role is Technical Support Manager, Pensions with James Hay Partnership. However, the views expressed in this article are Ian’s personal opinions and do not necessarily reflect the corporate view of James Hay Partnership.
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