2 min read 14 Apr 22
The Spring Statement was expected to be a relatively low-key affair – and DEFINITELY NOT a Budget. Which is not how things turned out. There were several significant and eye-catching announcements and much to ponder on in relation to the political agenda for the next couple of years and what it means for the financial services industry.
Firstly, the size of the increase in the National Insurance threshold, taking it up to the same level as the income tax threshold. This helps offset the NI rate increase for lower earners, it simplifies the overall tax system, and it continues the government agenda of taking lower earners out of the tax system. This all focuses more attention on workplace pension salary sacrifice: the additional savings thanks to the higher NI rates make it more attractive but more employees will be excluded from benefitting, given the increased threshold. This increases the relevance of good engagement and communication, which is set to be a recurring theme.
The Treasury has adopted a policy of exploitative inaction by freezing multiple thresholds and allowances, including the income tax personal allowance, the annual and lifetime pension allowances and the ISA allowance. The consequence of this fiscal drag is that for all the Chancellor’s protestations that he is a tax cutting Chancellor, he is raising billions of pounds of extra revenue by stealth.
The promised counterbalance to these tax rises is a 1p cut in the basic rate of income tax in 2024, just in time for the expected General Election that year. This was certainly a surprise but it’s small beer relative to the extra taxes he’s generating from the frozen thresholds.
Was the other noteworthy item of news issued on the day of the Spring Statement - from pension freedoms, up from £1.3 billion to £1.7 billion. The Treasury is also expecting this increased revenue to continue in the next few years; so, increased retirement income withdrawals seem to be here to stay, which potentially has implications for the long-term sustainability of people’s retirement savings.
The FCA has never entirely got on top of pension freedom, which is not surprising as it’s not easy. We’ve seen the progressive introduction of regulatory controls to protect consumers as they draw on their retirement savings and it is still far from certain the picture looks good. The latest news from the Treasury on tax payments may trigger the FCA to look at introducing further measures in this space.
Away from the Spring Statement and a few days later came the joint DWP/industry announcement, led by the PLSA and ABI, that the government and industry are going to work together on a pension awareness and engagement campaign later this year. This is a reflection of the Pensions Minister’s policy of promoting and facilitating member engagement in retirement planning (see Pension Dashboard, Simpler Statements, mid-life MOT etc for further examples).
Firstly, notwithstanding the recent dimming of Sunak’s political star in recent weeks, he is still an old-school Conservative who wants to shrink the state and to empower individuals to make their own way in life. Ever since pension freedoms and auto-enrolment were introduced, I believe pension tax relief has been on notice. It costs the Treasury huge amounts, it is regressive, complicated and poorly understood. There are reasons why it hasn’t been reformed, not least you need a lot of political capital to push through any major changes. So, erosion by stealth is likely to be the continued agenda for now, but I’m convinced if the government sees a window of opportunity to make further cuts to pension tax relief, they won’t hesitate to take it.
While we’re on the Treasury, watch out for the forthcoming Future Regulatory Framework, on which they have been working. Given the recent FCA announcement on PRIIPS KIDS, which was presented as an example of the kind of regulatory creativity made possible by Brexit, it would be surprising if the FRF doesn’t introduce some significant changes in financial regulation.
On auto-enrolment, there are widespread calls for the government to implement the recommended changes from the last review, bringing more employees into the scheme and starting at younger ages. The government has dragged its feet and I think it is likely to continue to do so. We may hear the announcement of a Pensions Bill in the forthcoming Queen’s Speech and it may be they will legislate for the changes to take place in a few years’ time, but my bet is the Treasury is in no hurry to sign off on the DWP’s plans: with inflation raging and NI hikes biting, the last thing people want to hear about just now is further deductions from their wage packet.
The DWP is keen to make good use of the Value for Money measure now being applied to occupational pension schemes and I expect to see this more widely applied across FCA regulated pensions too. This is potentially a powerful tool for policymakers to use in driving higher standards and more consolidation right across the UK’s pension system and is definitely one to keep an eye on.
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