The Pre-Budget Report: A policy of scorched earth
Having scrolled through the Pre-Budget Report, Jonathin Howard, head of corporate clients at Courtiers Wealth Management, gives his verdict on the implications for pensions.
Having just read though all 216 pages of the recent pre-Budget report, not to mention the 124 pages of further consultation on higher rate tax relief changes, I’m left with the distinct impression that Mr Brown and Mr Darling are embarking on a policy of scorched earth – make pensions so complicated for the next government that the whole system disintegrates, thereby paving the way for a triumphant Labour return in four years. I only hope they’ve considered what might happen if they actually manage to pull out a victory in 2010.
On the positive side, the government has stood by its pledge to increase the Basic State Pension by the greater of RPI or 2.5 per cent, which will take the total weekly amount for a single person to £97.65.
What you may not have read, however, is that the State Second Pension, which provides a significant pension top up to millions of people, will not be increasing next year. But that’s ok, we all appreciate that in these tough economic times you give with one hand and you take with the other, and besides, nobody really cares about the State Second Pension anyway, right?
Personal Accounts have suffered two major set-backs as a result of the PBR. The roll-out period has been extended by a further year, resulting in a five year gap between the first and last enrolments. Given that the Conservatives were ready to jump ship when it crept up to four years in October, surely this will see them running for the lifebelts.
It seems this delay has also spooked one of the companies bidding to run the scheme, Great-West Retirement Services, who dropped out of the race this week. This leaves the sole remaining bidder in an exceptionally strong negotiating position, despite the Personal Accounts Delivery Authority announcing that they 'are very pleased with the way [their] procurement process is going.' Well, as long as they’re happy.
You may be aware that the government introduced plans in April 2009 to limit the tax relief higher earners receive on contributions to UK pensions. The original rules caught anyone earning over £150k and would progressively reduce available relief from 40 per cent to 20 per cent on earnings up to £180k. Anyone earning above £180k would only get 20% relief.
I mentioned at the time that I thought this limit would gradually come down, but even I was surprised to see it being reduced already. Without getting into the detail, those earning £130k or more will now have to look carefully at their total remuneration package to ensure they still receive higher rate tax relief.
Whilst the Chancellor appears determined to undermine the public’s appetite for retirement provision, two changes announced in the PBR should actively encourage people to pay more money into pensions. The higher rate tax threshold is being frozen in 2012/13, which will create many more 40% tax payers, whilst employer and employee National Insurance rates are set to increase by 1 per cent from 2011/12 for anyone earning more than £20k. Both these taxes can be mitigated via pension contributions, although you should seek independent advice to ensure any planning is effective.
One piece of good news is that ‘financial capability and economic wellbeing’ are being introduced as part of the secondary school curriculum from 2011. At least there will be hope for the future!
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