Charlie Thomas, executive editor of the FT's Pensions Management magazine, explains how today's changes will affect the pensions landscape.

After weeks of fear and loathing surrounding how Chancellor George Osborne would attack long term savers, it appears that investors saving for their retirement may have got off lightly.

State pensions
As had been previously announced, the state pension will receive a boost by either receiving a minimum of 2.5 per cent lift or being linked to earnings, or prices, whichever is the greater.

Osborne also reiterated the government’s commitment to accelerating the rate of increasing the state pension age to 66. Previous proposals by the Conservatives stated they would raise the state retirement age to 66 by 2016 for men and in 2020 for women.

High earners 
While there was no concrete detail on whether the coalition government was prepared to reprieve earlier tax relief measures imposed by the former incumbents (which saw tax relief being gradually eroded for workers earning more than £130,000 a year), the Chancellor did make encouraging noises in terms of looking at “alternatives”.

The Budget report stated, 'Having listened to the concerns of the pensions industry and employers, the government has reservations about the approach adopted in Finance Act 2010.

'It believes this could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness.

“An alternative approach involving reform of existing allowances, principally of a significantly reduced annual allowance, might better meet the government’s objectives.

'In line with the commitment to tackling the fiscal deficit, the government will seek to ensure that it raises at least the same amount of revenue through restricting pensions tax relief as has already been accounted for in the public finances over the forecast period, and beyond that in steady state.'

Calls to reduce the annual allowance to £30,000 - 45,000 appear to be being taken seriously by the government, but the report stressed that the exact level would be influenced by a number of policy design features in the revised regime, including the appropriate level of the lifetime allowance. The Treasury would earn £3.5 billion from the proposed tax allowance.

Trevor Matthews, chief executive officer for Friends Provident, said that today’s commitment to look at replacing the previous government’s complex proposals is a move in the right direction.

He explained, 'It is a welcome first step that begins to remove the uncertainty that has been lingering over pension planning in the UK for some time. I am hopeful this will bring an end to the tinkering with tax relief on pension saving and now we can look forward to a more simplified and stable approach.' 

The government issued an appeal to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime, and will consider:

- how pension accrual in defined benefit schemes would be valued
- options to ensure basic-rate taxpayers are not subject to restriction
- options to support hard cases caused by one-off ‘spikes’ in pension accrual
- whether and how there could be flexibility for individuals over paying any charges that arise
- how compliance and delivery would operate in practice.

Alternatives to pensions
Elsewhere, many were predicting the rise in Capital Gains Tax (CGT) from 18 per cent to 28 per cent. From June 23 high earners are likely to be looking for alternatives, such as ISAs for their retirement savings.

Jon Sadler, head of retirement at Alico Wealth Management, advocated them looking at the lesser known maximum investment plans (MIPs).

He said: 'MIPs are another viable – if currently underused – option available to those who will be affected by these tax changes, not least because they can be used to defer or reduce higher rates of income tax.

'MIPs provide a tax efficient saving structure for higher-rate tax payers, enabling them to regularly save money which only requires them to pay basic rate income tax on the investment gain.

'With the government continuing to clamp down on tax structures – particularly on those which are based offshore – MIPs offer a tried and tested alternative for those who continue to be affected by changing tax rules.'

Equity release has also become a more viable alternative in recent years, with the industry working hard to shed off the negative connotations attached to it in years gone by.

Andrea Rozario, director general of equity release trade body SHIP, said the VAT hike would hit over 55s the hardest, since the demographic usually has a relatively fixed income.

'Equity release would seem the logical answer to [the issue of VAT increases eating into their income], and we believe the government’s changes will lead to more people considering equity release as an integral part of their pension planning,' she added.

Venture Capital Trusts
For the more adventurous investors, Venture Capital Trusts (VCTs) was also affected by the Budget. The government set out the four changes, to be included in a Finance Bill and introduced as soon as possible after parliament’s summer recess.

These were:
- VCTs will be able to list their shares in any EU/EEA country.
  (At the moment they can only be listed in the UK.) 

- VCTs will have to own at least 70 per cent of their investments in companies in eligible shares, up from the current   30 per cent.  However, the definition of eligible shares will change to allow shares which may carry certain
  preferential rights to dividends.

- Companies which are considered an ‘enterprise in difficulty’ are excluded from being a qualifying investment.

- Qualifying investments must only have a permanent establishment in the UK, rather than the current requirement for all or most of its business to be carried out domestically.

Annuities 
The Chancellor reiterated the government’s commitment to scrap compulsory annuitisation at 75 years old, pledging to remove the requirement by April 2011.

A consultation on the detail of this change would be launched shortly. An interim measure was also announced, ensuring those reaching 75 before the consultation concludes will have the flexibility to defer their decision until the rules are finalised.

Legislation for transitional arrangements for those who will reach 75 in the meantime - and are yet to secure an income - will be included in the Finance Bill, allowing those reaching age 75 on or after today’s Budget to defer their decision on what to do with their pension savings until after the new rules are finalised next year.

Prior to this anyone reaching age 75 either had to purchase an annuity or else go into alternatively secured pension. The bad news for annuities though, is that with an inflation target of 2 per cent and a smaller number of gilts being issued by the Debt Management Office (DMO), it appears rates will continue to be low for some time.

The DMO said it had cut its gilt issuance in 2010/11 by £20.2bn to £165.2bn, as a direct consequence of the new forecasts for the public finances published in the Budget.

At the time of writing, gilt prices were rising in reaction to Osborne’s plans for reducing public sector net debt. Public sector net borrowing will be £149 billion this year, £116 billion in 2012-13, before falling to £20 billion in 2015-16. Planned sales at auctions are being reduced by £14 billion to £132 billion.

Three gilt auctions are being cancelled; one each of short-, medium- and longdated conventional gilts, thereby reducing the number of planned gilt auctions in 2010-11 to 49.

The gilt auctions being cancelled are those previously scheduled for October 13, 2010, December 2, 2010 and January 20, 2011.

Many economists commented that the gilt market was expecting a relatively tough budget and a reduction in issuance, so much of this news was already priced in.