The Budget’s ‘silent revolution’ will progressively choke off pension saving down the income scale says Association of Consulting Actuaries chairman David Fairs
Despite public pronouncements that the objective is to simplify the pensions and savings regime, constant tinkering is simply adding greater complexity to an already ‘mind boggling’ array of products, choices and options.
Those on a basic salary of over £80,000 pa will likely be impacted by the new ‘simple’ tapered annual allowance. They can safely invest £10,000 in a pension, perhaps more if they can go through the complex process of working out where their earnings fall in the £150,000pa to £210,000pa range. But they can more easily invest twice as much in an ISA.
So someone with total income of £210,000, aiming to save 15 per cent of earnings towards their retirement will now save 1/3 in pension and 2/3rds in an ISA – a significant shift from EET – contributions and investment returns are tax-exempt while retirement income is taxed – to TEE -contributions are taxed, but returns and retirement income are tax-free- and with the latter also not receiving NIC relief. At those earnings levels, there is little public sympathy, but with the tapered annual allowance impacting those on base pay of £80,000 per annum the impact is now likely be felt on the well paid not just the high paid.
At the other end of the spectrum, Lifetime Isas sit uncomfortably with auto-enrolment. Do individuals with limited resources put their money into pensions or the Lifetime Isa because they probably can’t afford to do both? And as Government increases the options for early access under Lifetime Isas, surely Lifetime Isas will become the savings vehicle of choice? But it’s not a straightforward choice because of differences in tax, NIC and employer support.
But what then for pensions – because we are still left with significant differences between the pension that can be saved in DB and DC, complexities around the annual and lifetime allowance, we have UFPLS, flexible drawdown, annuities – a myriad of complex choices when we want to take benefits – compared to the simplicity of an Isa.
As ever, the landscape isn’t getting simpler, it gets ever more complex. Well-meaning calls for better financial education are simply ‘whistles in the dark’ whilst we see the solutions to every perceived dissatisfaction with the status quo as being resolved by further regulation and invention!
Simplicity requires exactly that – simple regimes where shorter-term savings attract lower returns and less available tax relief than longer-term investments.
Auto-enrolment has been said to be a great success to date at minimal contribution levels, but as required contributions under auto-enrolment begin to rise, will employees opt instead for a Lifetime ISA? And will that be the right choice?
At the ACA, we have called for changes to auto-enrolment, we have suggested the removal of the lower earnings deductible and a lowering of the threshold for auto-enrolment bringing more of the low paid and particularly women into auto-enrolment. We have also called for an increase in contribution levels from 8 to 16 per cent, with contributions to rise slowly so as not to increase opt outs.
Some have said these levels are generally not feasible or amount to over provision for the low paid. Well, they might not be feasible in the short-term, but in the longer-term they have to be if we are not to see growing numbers on minimal State benefits. And if they do represent over provision for the low paid, I can live with that. Retirement savings give people choices whereas no savings mean that retirement is dictated by the State and as we have seen from the WASPI campaign that is not always seen as fair or desirable.
We might well be facing a pension and savings revolution driven by the impact of low investment returns, but rather than a silent revolution perhaps what we really need is an independent savings commission that could provide a voice and challenge to make sure that changes to our savings framework are coherent, well thought through and for the long term good of us, the savers.
We must, however, be realistic in what we call for. Such a commission can only be advisory as pensions and savings policy is far too big an issue to remove from the control of the ‘powers that be’. But equally pensions and savings are too important to be subject to short-term political whim.