- Income tax rates cuts, NI cuts or rise in Personal Allowance?
- Modernising the Lifetime ISA
- Next steps with auto-enrolment reforms
- Progress on pension schemes investing more in private equity
- Update on raft of other Government pension reforms
Aegon’s Steven Cameron and Kate Smith set out what’s on their watchlist ahead of the Spring Budget on 6 March.
Income tax rates cuts, NI cuts or rise in Personal Allowance?
Steven Cameron, Pensions Director at Aegon, says:
“Lowering income tax rates would be a stand-out headline-grabber, but Jeremy Hunt could instead cut the employee NI rate or unfreeze the Personal Allowance.
“A 1% cut in income tax would have a similar impact on individuals’ net income as a 1% cut in employee National Insurance. But individual pension contributions are boosted by tax relief at your highest rate of income tax, so a cut to income tax rates means less pension tax relief. A cut in your rate of NI would not affect this.
“The Scottish Government sets its own rates of income tax, so any announcement at the UK level will not benefit Scottish residents, whereas a cut to National Insurance would apply right across the UK, including Scotland.
“For those over State Pension Age (currently 66), a cut in NI rates would offer no benefit as people above this age are exempt from paying NI.
“An alternative would be to unfreeze the Personal Allowance, the level above which we pay income tax and NI. Increasing this by, say, 10% to £13,827 would mean millions of people earning above this amount would be £377 better off in the first year. For anyone earning less than £50,270, this is more than the boost to take-home pay that would be generated by a 1% cut to income tax.
A fuller analysis of the three options available to the Chancellor can be found attached to this email.
Modernising the Lifetime ISA
Kate Smith, Head of Pensions at Aegon, comments:
“When the Lifetime ISA (LISA) was launched in April 2017, it was designed to offer both a tax incentivised means of saving for a first house and also an alternative vehicle for saving for retirement. However, various rules and restrictions are limiting its appeal, and it’s failed to keep up with the times, especially for those wishing to use a LISA to buy their own home. Now may be the time for the Chancellor to announce a raft of modernisation changes.
“Currently, you can’t open a LISA once you pass age 40, can only contribute a maximum of £4,000 per year, and can no longer contribute once you hit 50. Raising the maximum age for taking out a LISA, say to 50, will make them available to a wider audience, while allowing contributions to continue, possibly to 55, could enable LISA savers to build up larger sums, particularly if using the product as a retirement savings vehicle. The annual contribution limit is also restrictive and might be raised.
“These changes would make LISAs more effective as a retirement vehicle, particularly for the self-employed who don’t have access to workplace pensions with employer contributions.
“There’s also currently a property purchase cap of £450,000, which can cause problems for prospective first-time buyers – for example, in London and the South East. It may be time to consider if this cap is needed at all, or at the very least increasing it to allow more people to make full use of their LISA savings without being penalised.
“While LISAs receive a 25% initial Government bonus, if money is withdrawn for any reason other than for an eligible house purchase or after age 60, there’s an additional exit penalty. There have been calls to remove the additional penalty, although this could lead to LISAs not being used for their intended purpose.”
Progress on reforms to auto-enrolment
Kate Smith, Head of Pensions at Aegon, says:
“Automatic enrolment is one of the great successes in pensions policy, enabling over 10 million employees to save towards their retirement for the first time since its introduction in 2012.
“The Government recently confirmed its plans to enhance auto-enrolment: reducing the eligible auto-enrolment age from 22 to 18 and removing the ‘offset’ that currently bases contributions on earnings above £6,240.
“Having contributions calculated from the first £ of salary would mean millions of employees across the UK would see an extra £499 put into their pension each year. Starting to save into a pension 4 years early would also make a big difference by retirement age, particularly for women, who often experience more pension pauses than men due to caring responsibilities.
“The Chancellor may use his Budget to announce a consultation on next steps to implement these changes.”
Pension schemes investing in private equity
Steven Cameron, Pensions Director at Aegon, comments:
“The Chancellor used his Mansion House speech last July to launch the Mansion House Compact, under which a number of pension providers, including Aegon, committed to invest at least 5% of their workplace pension default funds in private assets by 2030. The aim here is to deliver higher investment returns for pension members, boosting their retirement incomes, while also increasing the flow of money into companies which can help UK economic growth. While this is a long-term initiative, the Chancellor may wish to provide an update on progress in his Budget.”
Other Government pension reforms
Steven Cameron, Pensions Director at Aegon, said:
“Last year, the Chancellor also unveiled a range of other pensions proposals, many of which could have major implications for the wider pensions market and the millions saving in pensions. We’ll be looking out for any mentions of initiatives regarding the consultation into allowing individuals to select a pension ‘pot for life’ over their employer’s chosen scheme, new retirement options for members of trust-based schemes, and progress with new forms of ‘collective defined contribution’ schemes.”
