After a pensions rumour mill that went into overdrive in the build-up, the 2012 Budget has been almost (whisper it) quiet for pensions. We were all on guard against a further cut in pensions tax relief down to £30,000 annual allowance, which, thankfully, didn’t materialise. To raid that particular piggy bank just at the dawn of automatic enrolment would have been a mistake. It would have just robbed employers of any lasting faith in pensions, meaning they introduce for their workers the lowest contribution rate in the safest fund possible. Meaning no-one achieves their pension hopes.
But there were some changes for pensions. After some considerable hard work, Steve Webb saw his dream of a single tier pension of £140 a week based on contributions get the official go-ahead. All we need to do now is figure out exactly how this will work in practice, and especially its interaction with contracting out. And presumably the White Paper to be published over the next few months will help us do that.
State pension age is to be reviewed automatically so that keeps pace with increases in longevity. This sounds like the thorny subject of SPA is going to be taken out of political hands and placed under a neutral watch. This is especially interesting for public-sector schemes whose retirement ages are now linked to SPA – they won’t have the government to blame, just a faceless actuarial/statistical entity. But with longevity still on the rise, it could mean that 30-somethings today are going to have to work until they are in their 70s. Not a pleasant thought.
Finally, there was also an announcement for pensioners. The age-related income tax personal allowances are to be removed and instead there will be just one personal allowance for everyone. True it will be a much more generous one, thanks to the Coalition Government’s aims to boost it up to £10,000, but the current system of age allowances really helps out moderate-income pensioners. In 2011/12, those between 65 and 75 were able to receive £2,465 more income before being taxed, and those over 75 £2,615 more income. These full age allowances however are only available to those earning less than £24,000.
These allowances will be frozen in cash terms at £10,500 and £10,660 respectively until the universal personal allowance catches up. And that action will raise a staggering total of £3.3bn of revenue for the Government over the next four years. Making it clear that moderate-earning pensioners are helping foot the tax cut bills.
Over the next couple of years, these changes could be a further blow to drawdown clients, who may see their incomes fall in their drawdown reviews because of the triple whammy of falling fund values, lower GAD limits, and revised GAD tables. Now, on top of that they will be effectively paying more tax. Consequently, they may be looking out for ways of increasing their net incomes, and that might mean transfers to investment-linked annuities to take advantage of the 120% income limit.
