How has the Budget affected the pension scene – and how might these and future changes impact your long-term retirement prospects? Mark Soper reports.

Pensions – usually the most yawn-inspiring of subjects – have not been out of the news in the last few months.

After the hullaballoo surrounding pensions freedom, arguably rushed in to give the Conservative Party some feel-good headlines just before the Election, we had several rabbits pulled out of hats in the very first Budget… the long-term implications of which are still being assessed.

Certainly all the indicators are that the Chancellor has by no means finished looking at pensions, and what we have had to date might well turn out to be the beginning of a root and branch realignment.

But one overriding assumption is that – while the feeling abroad is that this Government has been looking out for older people in recent years at the expense of younger generations – drill down to the detail and you can see that, in fact, successive changes made to the pension rules by the Coalition and the new Conservative Government will actually save the Treasury billions.

Famously, of course, the preceding Governments also dipped their hands into the pot: last year, the OBR estimated that Gordon Brown’s maverick raid on pension funds in 1997 – when he removed the dividend tax credits – saved the Treasury £118 billion between 1997 and 2014. At the time, pension funds were seen as an easy target as they were well stocked with funds from a buoyant stock market. Now many company funds are finding themselves well short of their future obligations.

There is now some speculation that the changes brought in since 2009 – together with the possible outcome of new Government consultations due to close in September – may bring in the same level of savings for the Treasury. So will that have the same draining effect on future incomes for tomorrow’s retirees?

To paraphrase a famous quotation, there are some known unknowns out there still to be unwrapped, and possibly even more unknown unknowns…

So the all-important detail of what we do know!

Certainly much has flowed from the Budget but, in a nutshell, on 8 July Osborne confirmed three key items:

• Re-confirmation that the Lifetime Allowance (LTA) will be reduced from £1.25m to £1m effective from 6 April 2016 (it will then rise in line with CPI from 6 April 2018).
• The Annual Allowance (AA – the maximum that you can put into pension plans before being penalised), already reduced to £40,000 p.a., was further reduced on a tapering basis for those earning £150,000 p.a. or more.  If you earn £210,000 or more, the AA reduces to £10,000.
• Green paper consultation was launched to consider the replacement of upfront tax relief on pension contributions going in… with a higher level of tax-free payments when benefits are paid out.

As always there is always a further flow of information surrounding the key points after these announcements.

Critically, these are:

• Pension contributions paid by employers will count towards ‘’earnings’’ for the purposes of calculating the reduced Annual Allowance. This could bring employees earning above £110,000 into a reduced Annual Allowance – further clarification from HMRC is awaited.
• Osborne has stated that the new consultation has no pre-judgement of the outcome.  However, it is interesting to point out that if all tax relief was removed on all pension contributions and all pension withdrawals were tax free, the equivalent tax saving to the Treasury exactly equates to the removal of the current 25% tax-free lump sum.

The Green Paper suggests that – to preserve an incentive to make pension savings (rather than ISA savings, for example) – the Government may consider a matching contribution rather than giving tax relief.

There is no clue how this may operate, but we foresee many problem areas in such a radical change.  Responses must be in by 30 September 2015.

Quite separately, the OTS (Office for Tax Simplification) has published its terms for its study on aligning income tax and NIC. One of its mandates is to look at the removal of employer NIC relief on employer pension contributions.  This of course will include any salary sacrifice contributions which have been very popular in the Auto Enrolment pension world.

The main concerns for everyone involved in personal finance is that – at the very time when society should be encouraging more of us to tuck funds away to secure what might prove to be a very long retirement indeed as life expectancy keeps on extending, to withdraw tax breaks at the point of saving could actually as a disincentive to save… not least because you won’t see the incentive of a disproportionate rise in your pension pot’s growth for every pound saved.

A rash of recent surveys have pointed out that a great many of us are already kicking our pension funding into the long grass: “jam tomorrow” in the form of funds being tax free at the point of drawdown in retirement might simply encourage that trend.

Of course, from the Government’s perspective, withholding tax benefits now would make it a case of “jam today” because it won’t be them contributing in the form of tax relief, but a Government 20, 30 or 40 years into the future.

Pensions a political football? You bet!