Steven Cameron, Pensions Director at Aegon comments.
Potential changes this week – employer NI cut, a reduction in VAT and a temporary lifting of stamp duty
“On Wednesday, Chancellor Rishi Sunak will provide an economic update which should give some indication of how he plans to stimulate an economic bounce-back. Any changes should be implemented through a lens of intergenerational fairness and we have already seen the Chancellor looking to provide additional support for young people in a turbulent job market.
“Some immediate changes could include a cut in employer National Insurance to encourage employment or a reduction in VAT to stimulate consumer spending and there could also be targeted extensions to support packages such as the furlough scheme, possibly repositioned as a wage subsidy or opportunity fund. The Chancellor may also look to the housing market to boost economic recovery with a temporary lifting of the stamp duty threshold.
“A cut in employer NI would reduce costs for employers and prove a welcome boost to employment. There are some pension implications to consider because where an employer pays a contribution to an employee’s pension, they don’t pay National Insurance. This has led to some employers offering ‘salary sacrifice’ arrangements where employees agree to a pay cut in return for a greater employer pension contribution, with the employer passing on their NI saving to the employee. If employer NI rates fall, they’ll make less saving on their pension contributions making salary sacrifice arrangements less attractive for them.
“With initial expectations of a full-blown emergency Budget quickly dampened, we expect more fundamental changes, for example any adjustment to the state pension triple lock, to be deferred until the Autumn Budget. The Chancellor has already shown he’s more than capable of introducing truly radical and unprecedented measures so we could be in for some surprises. But deferring decisions until the Autumn will offer Sunak more time to assess how the economy performs over the summer months as lockdown unwinds.
“In the meantime, we’d welcome the Government taking this opportunity to launch consultations to allow proper consideration of possible future changes and avoid unintended consequences. This might include a review of the pensions tax relief system, an alignment of income tax and NI between employees and the self-employed, a recalibration of wealth taxes or a drive to encourage pension funds to invest more in long-term infrastructure projects. There’s also the extremely overdue matter of finding a sustainable solution to social care funding, which needs proper consultation to ensure widespread public buy-in.
"A temporary lifting of the threshold for stamp duty on house purchases might benefit some seeking to move home. This could include encouraging some retirees to downsize to release equity in their homes to supplement pension pots which in turn might free up larger family homes, a generational win-win. Although, as the tax has been devolved, a UK-wide lifting of the thresholds would need to be agreed by the devolved administrations in Scotland and Wales.”
6 areas the Chancellor may return to in the Autumn Budget
1. Pensions tax relief
“While pensions ‘cost’ the Exchequer in the short term because they reduce people’s income tax bill, it’s vital individuals and their employers are encouraged to save for retirement so any reforms mustn’t remove that incentive. And any move to an ISA style regime for pensions, as was recently proposed by the Centre for Policy Studies, could seriously damage the success of automatic enrolment and the benefits of pension freedoms.”
2. Temporary or permanent reform of the triple lock
“The triple lock under which state pensions increase at the highest of price inflation, average earnings growth or 2.5% a year was set in a very different pre COVID-19 age when price and earnings growth tended to be relatively stable year on year. Blindly following that formula now as we move through and out of the coronavirus crisis with huge distortions to average earnings expected could create bizarre results which were never intended and which would fail any test of intergenerational fairness.
“If as a result of the furlough scheme we see a sharp dip in average earnings this year followed by a quick and full recovery the next, the triple lock would still grant pensioners a 2.5% minimum increase next year and potentially put them on track for a double digit increase in 2022, while those of working age might have simply regained their pre COVID-19 earnings. The Chancellor will have to make a call as to whether to suspend the earnings related element or perhaps adjust it to smooth out sharp fluctuations or to make a more fundamental change, with some people viewing it as overly generous.
3. Wealth taxes
“As we begin to put the nation’s finances back on a sounder footing, questions will be asked around how to share the costs between different generations and sectors. This could prompt a fundamental review of how we tax wealth compared to income.”
4. Infrastructure Investment using pensions
“The Government has already announced ambitious plans to ramp up investment in infrastructure. Pension funds, which often invest for the long term, may see this as an attractive means of boosting long term returns. However, this mustn’t be taken as a given as trustees must be allowed to invest where they choose in the best interest of their members and beneficiaries, and defined contribution schemes must also make sure they have sufficient liquid assets and be able to provide online valuations to their members on a daily basis.”
5. Social care funding
“With those in care homes being amongst the worst affected by the COVID-19 crisis, it’s imperative that the Government tackles the longstanding issue of how to find a sustainable and fair means of funding social care, guaranteeing our most vulnerable elderly dignity in later life. This is likely to require a sharing of costs between the Government and individuals, based on their wealth. What’s vital is that people have certainty over what they’ll be expected to contribute so they can plan ahead and protect their inheritance aspirations.”
6. Self employed
“The numbers of self-employed have grown dramatically in recent years and we’ve also seen the emergence of the gig economy. The COVID-19 pandemic has shown the need for both employees and the self-employed to be offered support and protections and this could lead to greater alignment between income tax, NI and access to state benefits.”
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