PENSIONSANDSAVINGS.COM

3 December 2014

So what has happened in the Autumn statement?

Summary

• No change to pensions tax relief but extra tax breaks for joint life annuities
• Levelling the playing field between annuities and drawdown inherited benefits
• New tax breaks for ISAs – will be inherited tax free between spouses
• Tax breaks for carers and careworkers
• Bigger rise in Pension Credit
• More generous means-testing calculation for pensioners with pension funds
• Promise of a pilot back-to-work scheme for older people on benefits
• Stamp Duty reform to help 98% of housebuyers

What’s missing

• Measures to incentivise training and employment of older jobseekers
• Incentives to save for care
• Incentives for pension funds to invest in infrastructure
• The name for the Guidance Guarantee service
• Protection for annuity and pension customers
• The interest rates that will be paid on pensioner bonds

After the Chancellor’s Budget last March, which was such fantastic news for pensions and ISAs, but a painful shock for many insurers, I assume most of the financial services industry listened anxiously to the Autumn Statement.  They needn’t have worried.

It was, of course, impossible to upstage the Budget’s impact on pensions and the over 50s, but there were some announcements worthy of note.

Pensions tax relief – no change

The Chancellor has decided not to make any changes to pensions tax relief, despite some speculation that this was on the cards.  The pensions tax relief limits remain unchanged and people will still be able to contribute to pensions up to age 75.  After so much upheaval, it is important to allow the system to settle down so that individuals can make serious long-term financial plans in the knowledge that the goalposts won’t be moved.

The new pensions landscape will require significant changes in products and processes and If the government wants the industry to reform, we need a period of stability to allow this to happen.  We need to see interesting innovations from financial services firms, but it does mean that the industry needs time to change technologies and products properly and provide better outcomes for consumers, without fearing further radical overhauls.

Widows and widowers can inherit joint life annuity income tax free and any nominated beneficiary will be allowed to inherit an annuity in future products

New rules about inheriting pensions have been announced – although they were widely leaked before the Chancellor’s Statement.  Under previous rules, those who inherited pensions would pay 55% tax on remaining pension assets in drawdown funds, but that penal tax has now been abolished.  In order to level the playing field between drawdown and annuities somewhat, the Chancellor has announced that the income inherited by widows or widowers from their partner’s ‘joint life’ annuity, as well as beneficiaries of guaranteed term annuities, will also receive the money tax-free if the person passed away before age 75.  Having scrapped the 55% tax on inherited pension drawdown funds and allowing remaining pension assets at death to be passed on as a pension, tax free, it seems right that inherited annuity income should enjoy the same privilege.  Anyone who has already bought joint-life annuity (which is a minority of people, but nevertheless significant) could be better off as a result of this change.  The majority of past annuity purchases, however, were single life products which will not benefit.

Most importantly though, these new rules, coupled with the new Pension Guidance, should help ensure more people cover their partner as well as themselves when buying a lifelong pension income.  The annuity tax rules are also being amended so that joint-life annuities in future can cover any nominated beneficiary, not just a spouse or civil partner.

New tax breaks for ISAs

The new ISA limit for next year will rise in line with cpi to £15,240 from current level of £15,000 (and Junior ISAs to £4,080).  There are also new tax breaks for the 150,000 married ISA savers who die each year.  Currently, when they die, their ISA just goes into their estate and the ISA tax advantages are lost.  However, the Chancellor is proposing that those who die can pass on their ISA accounts to their spouse or civil partner free of tax.  So ISAs will pass on as ISAs, to increase savings income for widows or widowers.  The Treasury is also considering allowing ISAs to invest in crowdfunding debt.

Help for Carers

One of the biggest problems facing families in future is likely to be the cost (both in time and money) of caring for older loved ones.  As the population ages and life expectancy rises, the numbers needing care will rise sharply in future years.  The Chancellor has announced a little extra help for people who are caring for loved ones.  The Carer’s Allowance earnings limit will increase to £110a week next April (it is currently £102pw), which could help more people work part-time without losing Carer’s Allowance.

In addition, the Chancellor is going to extend the £2000 rebate on National Insurance Contributions to cover careworkers.  The Employment Allowance will mean a family who directly employ a careworker earning up to £22,500 a year will not pay any National Insurance.  In addition, careworkers will not be affected by removing the £8,5000 threshold applying to tax on benefits in kind.  The care industry desperately needs more workers and any relief on tax or NI can help the affordability of care for families and improve the poor pay of care staff.

Notional income calculation for means-tested benefits – assume annuity income is received even if not annuitized, so poorest will not lose out by not buying annuities

There has been significant concern that the changes to pension rules could unfairly hit those on lowest incomes, but the Chancellor has addressed this.  There were fears that those on means-tested benefits who did not buy an annuity would be penalised.  Under the previous system, if you had bought an annuity, only the annuity income itself would be included in your income.  However, for those who had a pension fund which was in drawdown, the means-testing benefit calculation would use an estimate of the income you could have received and that ‘notional income’ would be included in your income assessment.  If there had been no change, this would have assumed that the income you received from your pension fund was actually 150% of the amount you could have received from an annuity (rather than just 100% of the annuity which is what you would have had if you’d actually bought one).  This would have meant lower income households were penalised for choosing not to annuitise, which is not the Chancellor’s intention.  So, in order to create a level playing field between annuities and leaving the money invested in your pension fund instead, the notional income calculation for means-testing is being changed from next April.  (The 150% of the equivalent annuity rate was assumed under the old rules because this was the upper limit for capped drawdown and was based on the Government Actuary’s Department estimate of market annuity rates, known as the GAD rate).  It is good news that the lowest income pension savers will not find themselves significantly worse off if they want to keep their money invested in their pension fund.  It will be important for the Guidance to help them realise that they need to keep the money inside their pension fund in order to benefit from these rules.  If they move it to another type of savings account, they lose tax benefits and may find their income is assumed to be higher.  Of course, they could also just spend the money or use it to repay debt, rather than buying an annuity which could also help their long-term financial future.

It is interesting to note that, in fact, the means testing calculation for social care, which was announced in October, had already adopted this new approach, but this does not seem to have been picked up.  The Autumn Statement is another opportunity to highlight this change that will help the poorest older people.  There is no change to the tariff income assumed from savings other than pensions.

Pension Credit uprating

The DWP has decided it will uprate the Pension Credit level in line with the rise in the Basic State Pension, even though this is above inflation.  The Basic State Pension is set to increase by 2.5% next April, a rise of £2.85 to £115.95 a week (from the current level of £113.10).  Pension credit, however, was only due to rise in line with inflation which was 1.2% (and the additional parts of the state pension such as State Second Pension S2P will rise by 1.2%).  However, in order to retain the differential between Basic State Pension and Pension Credit, the Pension Credit Guarantee Credit will increase by the same cash amount as the Basic State Pension i.e. to £151.20 a week for a single pensioner (from £148.35 a week at the moment).  This is slightly more than it otherwise would have increased (about £1-78 a week extra) and will be of help to the poorest pensioners. This move also has implications for the level of the new State Pension that will be introduced from April 2016, since the new single tier state pension will be set to exceed the level of Pension Credit Guarantee Credit, so by increasing this, the new State Pension will also be able to start at a higher level.  It will thus have to be more than £151.20 a week – it will be at least £151.25 at the full rate from April 2016. ,

Part of the extra cost of uprating the Pension Credit Guarantee level will be recouped from pensioners with savings, as the Savings Credit threshold will be increased by 5.1%, so the poorest pensioners who have some savings will lose out on some extra income.  Savings credit gives extra money to people who have saved, but you only receive this credit if your income is above the Savings Credit threshold of £120.35 a week for a single person).  The Savings Credit threshold will be increased by 5.1%, so more people will fall below the new threshold and lose out on savings credit income.  For every £1 by which your income exceeds the threshold, the Government pays you 60p, but this is one of the most complex calculations and most people simply do not understand it.  The maximum savings credit anyone can get is £16-80 a week and many of those entitled never actually claim because it is so complicated.  Nevertheless, some people will lose out when the Savings Credit is increased.

Stamp Duty reform

This is great news for most housebuyers.  98% of home buyers will pay lower stamp duty as a result of the reforms that have been announced.  Many older people have houses larger than they really need, but the costs of moving have put them off downsizing.  The reform of stamp duty should help free up more movement in the housing market.  There also needs to be a construction programme to build homes that older people might want to aspire to downsize to, which will further help them move on to more suitable housing.

Stamp duty has long been a most unfair tax. This ‘slab’ tax creates distortions around the threshold levels and reform has been long overdue – under the current system imposes, tax is paid on the whole property value, not just the marginal extra slice as with income tax at the rates shown in the table below. As an example of the unfairness, if you buy a home worth just under £250,000 you pay 1% tax, or £2,500.  But if you buy a home for £251,000, then you pay 3% which is £7,530.  This creates significant distortions around the tax rate thresholds which interfere with a free market.

Current Stamp Duty Tax Rates

>£2m                           7%

Scotland has already decided to change its own stamp duty rules from next April.  The Scottish Parliament wants the most expensive homes to bear a higher burden of the tax, and now the Chancellor is following Scotland’s lead.  Scotland’s measures have zero stamp duty on the first £135,000, then 2% duty on the extra up to £250,000, 10% on the amount between £250,000 up to £1m and 12% on the balance over £1m.  The Treasury has used different rates and thresholds, but the same principle as Scotland, so the new system will have the following rates.

New Stamp Duty system

>£1.5m                                    12%

Under the new rules, someone buying a house worth £251,000 will pay £2520 in stamp duty (rather than the £7530 under the old system.).  Those who have already exchanged contracts but not completed will be able to choose whether to use the old or new tax systems.

What’s still missing?

Measures to incentivise employers to train and employ older people

The Chancellor has, quite understandably, focussed on getting young people into work and subsidised apprenticeships.  Paying employers to take on young people is obviously beneficial, but has had the knock on effect of stopping employers from taking on older people as apprentices.  The over 50s are the group most likely to be long-term unemployed and need urgent help to get back into work.  The two biggest problems they face are ageism at work and lack of skills – these two factors combine to product a loss of confidence.  The Chancellor has promised (see page 89 of the Green Book) that from April 2015 there will be some back to work support for older people, with the Government piloting career change work experience and training schemes for older benefit claimants who are out of work.  This could help them achieve the training and experience they need to re-skill and move back into work.  I would like to see the Government go much further than this and fund proper over 50s training schemes.  It is so important to help the unemployed over50s find work.  We have had tremendous success in reducing unemployment for younger people, which has rightly been a significant policy focus, however there are serious problems for older people who face age discrimination in the labour market.

By ensuring more older people find work, the long-term growth of the economy will be boosted.  In our aging population, with so many more over 50s in coming years, failing to ensure as many as possible can find work is a recipe for economic decline and a real waste of talent.  I am so pleased that the Government has understood the need to intervene to help overcome the problems faced by older jobseekers.  Having met a number of out-of-work older people recently, I hear time and again that they feel they are not taken seriously when looking for work.  They lack up to date skills and experience, but having a chance of training and work experience gives them the opportunity to show what they can do.  Rather than being written off as ‘too old’ or ‘past it’, these new initiatives can help restore their confidence and self-esteem by moving back into work.

We need to do more to ensure older people’s skills are kept up to date, they have the chance to change careers if necessary, they can combine work with caring responsibilities and return to work after caring if they wish to.  Flexible working and even apprenticeships, returnships or mentoring are all important to help the employment prospects for over 50s.  Just one year delay in average retirement age can add 1% to economic growth and will increase lifetime incomes and national spending.

Specific incentives to save for social care

The Chancellor has not yet announced specific new incentives to help people save for later life care.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care if needed and, if the ISA could be passed on free of Inheritance Tax if not spent on care, then many people might start earmarking their ISA savings for care.  The new pension freedoms can also encourage people to leave money in their pension funds to pay for care in later life, however further incentives may also be necessary.  A specific tax break for care savings would help focus people’s attention on this vital issue.

Pensioner Bonds – what interest rate? We will know on 12 December

The Government says it will announce the interest rates for the new Pensioner bonds on 12 December 2014.  It has promised two different fixed rate market leading interest rate bonds to be available to people over age 65 from January 2015.  The original announcement was for each person to be able to buy up to £10,000 of a 2 year and a 5 year bond with interest rates of 2.8% or 4% respectively – let’s hope those plans haven’t changed.

Incentives for pension funds to invest in infrastructure

I am hoping that, sooner or later, the Government will wake up to the power of pension funds to invest in productive projects that can both help the economy and improve scheme funding. Infrastructure is an ideal asset to add to pension portfolios, as they offer the benefit of diversification which can reduce risk and potential inflation linked long term income streams.  If the Government were to underpin such investments, perhaps investments it would otherwise undertake itself by borrowing in the gilt market, then it could avoid worsening the deficit by only having to pay if the pension fund did not make sufficient returns to exceed gilt yields.  By offering at least gilt yields as a contingent payment in the event that a new infrastructure project did not deliver better returns in, say, 5 or 10 years’ time, the Chancellor could save the initial outlay and may never have to fund the project, but the economy would benefit from job creation in the meantime.  And if the project did succeed, the improved infrastructure would provide additional economic benefits and the funding of UK pensions would improve.  Offering meaningful incentives to UK pension funds to encourage them to use their assets to take construction risk on infrastructure projects, organised by trusted third parties, could boost the UK economy but the Pensions Infrastructure Project that was set up does not have such incentives in place.  That has failed to attract sufficient funding and has focussed on investing in existing projects or infrastructure secondary market debt, which does not have the same economic benefits or potential rewards as new projects.  Obviously these investments do carry greater risk, which is why a Government underpin that promises at least gilt yield returns if projects do not perform well enough could attract more money.  That way, the taxpayer would not need to commit money upfront while the public finances are so stretched, but domestic savings could be used to boost both the economy and pension fund returns.

Guaranteed Guidance for pension savers– what will the brand name be?

We need to know what the name of the guidance will be.  It is supposed to help individuals with their pension decisions and guide them to the information they need to assess what they should do.  The government must now urgently start to promote this service, to build up a strong brand recognition.  The more people who take up the guidance, the more likely they are to understand the important issues they need to consider when reaching their scheme pension age.  It will be very important to explain that this is not ‘advice’ and those giving the information are ‘Guides’ not ‘Advisers’.  If people want individual, tailored expert help to know what is the best decision for their own circumstances, and someone to take responsibility for it, they need to pay for independent financial advice.

Force pension companies to treat annuity customers fairly – reform sales process

It is disappointing that we did not see any new measures to reform the annuity market.  There are many ways in which the annuity sales process is failing to ensure customers are treated fairly by their providers.  Reforms are urgently required to revamp the way annuities are sold, including the following measures:

• Introduce standard forms written in plain English, to explain annuity products
• Providers must ask basic questions to establish suitability before selling an annuity.  For example, if the annuity assumes the customer is in good health, then this must be made clear and the company must ask about their health
• Providers must explain the risks of annuities – for example that there is no inflation protection and no partner’s pension if the customer dies early
• The FCA should ban hidden commission and require anyone selling or facilitating annuity sales to declare upfront how much money the customer will pay if buying an annuity and whether independent advice is being given.